Research Corner Modernizing Tax Policy:
Let’s make ringtones jingle our registers as well as our phones
to these transactions (whether or not sold or transferred over the Internet). How much tax revenue is Arkansas losing? Why haven’t the sales tax laws in Arkan- sas been updated? In 1977 over 300 million cassette
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tapes were sold in the United States. Last year only approximately 2 million cassette tapes were sold nationwide. Elec- tronic books, movies, music (“iTunes”), ringtones, games, greeting cards and mobile software applications are now most frequently produced as digital files (referred to as “digital goods and services”). Commerce has dramatically changed and these sales are in the tens of billions and growing. Te Internet is no longer a fledgling enterprise and digital goods are the norm. Consumers bought approxi- mately 2.5 billion mobile applications in 2009 for smart phones; and projec- tions for 2015 exceed 25 billion. Due to teenagers constantly swapping ringtones, ringtone sales are also expected to exceed $10 billion in sales this year, and digital music downloads are expected to exceed $10 billion in sales. Analysts predict these products will have substantial growth and have dubbed 2010 as: the “year of the ebook” – with sales forecast to triple to near 300 million. Most of these purchases are discretionary purchases, not made in connection with business or personal necessity.
Arkansas is one of 19 states which are in compliance with the
“Streamlined Sales and Use Tax Agreement (“SSUTA”). Te participa- tion of Arkansas in the streamlined tax compact and voluntary payments by retailers already produces over $7 million in state revenue annually. Te General Assembly has recognized the need to tax online sales. Also, the National Association of Counties, the National League of Cities and the National Governors Association support streamline and main street tax fairness. However, under current Arkansas law, digital goods such as iTunes, ebooks and ringtones are not even covered by the definition
COUNTY LINES, FALL 2010
usic, movies, books, ringtones and software products – products that are historically articles of tangible property – are now produced and transferred as digital files.
Yet, the sales tax laws in Arkansas do not apply Tax policies generally adapt with the advent of new types of prod-
ucts. Is it sound tax policy to tax books but not ebooks? Since it is plain that these products are now sold in digital form, shouldn’t tax policy keep pace with commerce? Shouldn’t a distributor that markets an electronic product and contracts with affiliates in the State of Arkan- sas to sell their electronic product in Arkansas be considered to have the requisite minimum contacts in the state to trigger the sales and use tax?
Nineteen states have enacted legislation to broaden their sales and use taxes to digital goods and services. Some states such as Colorado, Rhode Island and New York have modernized their laws on the requisite minimum nexus of a retailer or their af- filiates for purposes of collecting state and local sales and use taxes. With progress comes the need to modernize tax policies. Wisconsin has recently modernized its tax policy to tax “digital downloads” of books, music, games and ringtones which is expected to generate about $7 million a year for that state. Since national experts estimate that downloads are growing by as much as 20% a year, the amount of sales tax in that area will grow substan- tially.
Officials in the Dairyland State say it is
a matter of fairness: Internet vendors shouldn’t have a tax-exempt advan- tage over brick-and-mortar retail stores. Like the Streamlined Sales Tax, taxing digital goods applies the sales tax in the same way to the same products. Wisconsin officials tout that this change protects Main Street businesses.
With recent losses in revenue from the recession, reduction of the sales tax on groceries and spending on lottery tickets, can the cities, counties and State of Arkansas continue to allow revenues from pur- chases of digital goods to fall between the cracks?
MARK WHITMORE AAC Chief Counsel
of tangible property. Te state and local sales tax applies if software is purchased and it is placed on a disc. However, the sale of an identical software product transferred in electronic form is not taxed.
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