Taxable Talk

Last October, I inched my way towards the 21st Century and bought an iPod. I find it wonderful, because when I'm at the gym I can listen to music that I like, not the techno-garbage that my gym plays.

iPods haven't been bad for Apple, either, as they've become a ubiquitous symbol of the 21st Century. Apple's iTunes store is doing a booming business, selling downloads of music.

And the Tax Man Cometh.

In California, music is not subject to sales tax because it is not considered tangible personal property (something you can hold). But that's not the case in many states. If you live in Washington, Texas, or Indiana, you need to pay either sales tax or use tax on your iTunes downloads. And as this CNET story states, many other states are looking at taxing the downloads.

Of course, you could live in Oregon—the state with no sales tax. If you don't, you may find that download costs an extra 5% to 10% as states continue to move forward in taxing the Internet.

You're a business owner, and you've just won a nice contract with the State of California. Don't forget to add sales tax.

Yes, if you're selling to the State of California, you must charge California sales tax. Let's look at this logically, based on a $10,000 sale to a state agency.

We'll assume that the sale is made in Orange County (sales tax rate of 7.75%), resulting in sales tax of $775.00. You collect $10,775, keep $10,000, and then remit $775 back to California. The Board of Equalization collects the money, and then turns it over to the General Fund. The General Fund allocates the money to the appropriate state and local agencies, including the agency that you sold to.

Wouldn't life be simpler if the state were exempt from state sales tax? You could argue that local and state agencies wouldn't benefit from the sale. However, the real beneficiaries of California's policy are the bureaucrats administering sales tax. California's rules increase their workload and lead to more employees. If California were to exclude government sales from sales taxes, sales tax revenues would go down, of course. But so would expenses.

In the end it would be a wash (as far as direct revenues and expenses). However, because you would need fewer employees to administer the Board of Equalization, and a bit less time for companies to prepare their quarterly reports to the BOE, costs would decrease and productivity would increase.

What are the chance of this happening? Just about zero.