Net Music Figures Prominently in Internet Tax Debate

Should Internet sales be subject to taxation? California's US Senator Diane Feinstein doesn't think so. Neither do most of her constituents in Silicon Valley, who are riding an unprecedented wave of prosperity as the growth of Internet commerce continues. Many folks outside Silicon Valley, especially traditional retailers, see no reason why e-commerce should be exempt from sales taxes.

The lack of sales tax has always been a strong draw for mail-order catalog sales, especially of music recordings. Despite low numbers relative to annual music sales of all kinds (more than $14 billion in the US alone last year), Internet music sales are so prominent in the public mind that they are also figuring prominently in the tax debate. The US economy is stronger than it has ever been, a fact many attribute to the Internet phenomenon, and lawmakers are reluctant to fix something that isn't broken.

Even so, there have been several recent legislative proposals introduced to create tax parity between online and offline sales of products such as music CDs. Taxation is always the subject of great debate, and while the debate goes on, the government is temporarily banning sales taxes on "certain products available in both digital and tangible forms."

A 19-member group of concerned businesses, academics, and non-profit organizations known as the Advisory Commission on Electronic Commerce has been created by Congress to make recommendations on Internet taxation. One of the group's main concerns is how to equalize online and offline retailers. The absence of taxes is a strong inducement for consumers to shop online, even though shipping costs can outweigh tax savings. Sometimes, buyers must pay both shipping and tax if they buy from a seller within their own states, as California and New York residents must do when buying music from online retailer

Music sales are attracting attention of both advisors and legislators because recordings were among the first items to be offered in significant numbers on the Net. Leigh Fazzina of CDnow says her company supports the business caucus's efforts to forge a compromise that "standardizes the tax application for all consumers, regardless of where they live, and allows the states time to simplify their tax requirements in a proposal for Congress." The Recording Industry Association of America has yet to take a formal position on Internet taxation. The ACEC is expected to draft recommendations to Congress at its next meeting in Dallas, later this month.