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iTunes, iTaxed?

By Rick Munarriz - Updated Apr 5, 2017 at 7:58PM

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Should states charge tax on digital downloads?

The tax man wants a piece of your tunes. Facing a sadly common budget shortfall, New York is now the latest state to consider a tax on digital downloads.

Gov. David Paterson is proposing dozens of new fees and taxes, according to yesterday's New York Daily News, including an "iPod tax" that would apply to Apple's (NASDAQ:AAPL) iTunes downloads and other "digitally delivered entertainment services." Paterson's proposals need the legislature's approval to become law.

The potential tax isn't just bad news for Apple. (NASDAQ:AMZN) has also championed digital initiatives in music, video, and even books, via its Kindle e-book reader. Amazon already locked legal horns with New York earlier this year over the taxation of physical goods shipped to the state.

An "iPod tax" could also set back the legal downloading movement. Digital purchases and streaming music-subscription services like Napster and RealNetworks' (NASDAQ:RNWK) Rhapsody have emerged as white-hat alternatives to illegal peer-to-peer file swapping. Is punishing legal buyers prudent?

The only potential winner here may be Netflix (NASDAQ:NFLX). Since it's already being taxed in states where it has a physical presence through its network of DVD distribution centers, a tax on digital delivery would make its own instant streaming service -- available to existing subscribers at no additional cost -- an even better value, compared to piecemeal players like Apple, Amazon, and Blockbuster (NYSE:BBI).

New York is not the first state to propose a digital delivery tax. However, at a time when nascent digital-delivery industries are just starting to catch on, making online offerings slightly more expensive won't broaden their popularity. If anything, it may turn people toward black-hat alternatives, or force companies to resort to ad-supported free models that skirt the state tax rolls altogether.

The future is coming. Unfortunately for downloaders, it seems the tax man's already gotten there.

Further fee-free Foolishness:

Is New York's "iPod tax" right or wrong? Post your thoughts in the comment box below.

Netflix,, and Apple are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz lives in the somewhat tax-friendly state of Florida. He does not own shares in any of the companies mentioned here. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is thinking of The Beatles, for some reason.

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