An iTax on downloads just doesn't compute
Member of the California Board of Equalization : District Three

Last September, the Daily Breeze opinion pages featured my column titled "Keep your eye on iTax plans," in which I warned about the possibility of a new tax on digital downloads. At that time I theorized that California lawmakers desperate to close a multibillion-dollar budget gap might turn to a new tax on music and movie downloads as a solution. Current law prevents sales and use taxes from being levied on music, movie and software downloads because they are not considered tangible personal property.

Sure enough, my prediction was correct. In January, Assemblyman Charles Calderon, D-Whittier, introduced Assembly Bill 1956, which would expand the sales tax to digital goods. Although I may have predicted California's iTax, even I could not have imagined a bill as bad as this one. Not only does AB 1956 create a troublesome new tax, but it also blatantly violates California's constitutional requirement that all tax increases receive two-thirds legislative approval.

Proposition 13, best known for its property tax protections, also guarantees that all tax increases receive two-thirds approval from both houses of the Legislature. Like sneaky, malicious spyware, AB 1956 avoids this two-thirds vote requirement by requiring the Board of Equalization to do the Legislature's dirty work. This bill orders the Board of Equalization to redefine tangible personal property as including digital downloads in order to make them subject to tax.

An affront to common sense

California's sales tax law limits sales tax to tangible personal property - products that can be seen, felt or touched. This new regulatory re-interpretation contradicts 75 years of established tax law and common sense. Moreover, it eliminates accountability in the state budget process. State legislators would have a political incentive to send all future tax increases to the Board of Equalization in order to avoid a bad political vote.

Setting aside the procedural problems of AB 1956, an iTax in general terms is bad public policy. It's an ineffective tax that will drive away e-commerce. When it comes to generating revenue, an iTax would be as effective as your e-mail program's spam filter. Online media stores could easily create a separate entity out of state (or even out of the country), thereby avoiding sales taxes altogether.

Under such a situation, California taxpayers would be obligated to report those purchases individually and pay the "honor-system-enforced" use tax, which has a 99.8 percent noncompliance rate.

Benefits of e-commerce

In the process, California would not only fail to capture the sales tax revenue, but lose the overall economic benefits of e-commerce. More so than any other state, California has scored big from e-commerce. Online commerce brings high-paying jobs, major economic benefits and significant tax revenue to the Golden State. State government has received increased capital gains, property, income and business taxes from e-businesses.

In 2006, capital gains from the stock sales of just 16 Google employees generated $380 million in tax revenue for California. Meanwhile, the Board of Equalization estimates that California fails to collect $1.1billion in sales tax revenue from e-commerce transactions. Just 16 Google employees' capital-gains taxes offset close to 40 percent of the tax agency's estimated lost use-tax revenue from all of e-commerce.

Reasonable people disagree on whether the sales tax should be expanded to digital products. Pro-tax advocates argue that the sales tax base is eroding with the consumer shift away from conventional CD sales.

Just last month, iTunes surpassed Best Buy and Target as the No. 2 music retailer in the country. AB1956 undermines this important public policy debate by skirting the legislative process.

California's budget problems require serious solutions, not sneaky gimmicks that avoid public accountability. If lawmakers think a new tax on digital products will help solve our state's $16billion budget deficit, they should debate the bill openly, honestly and legally.

Michelle Steel is a member of the California State Board of Equalization, California's sales and use tax agency. She represents a district that includes part of Long Beach and the South Bay.