Use Tax On iTunes? It Doesn’t Make Sense.

Another Tax Geek asked me whether I pay Use Tax on my iTunes purchases (you can answer him, too, by voting in our poll in the sidebar). I do not. I started to reply in the comments and felt that my comment was a bit wordy (as I tend to be) and I felt that it really deserved a separate reply.

To be clear, I understand that I am required to pay tax on my iTunes. Mine is not an argument about defiance or the parity of the tax. It’s more about realism, reporting and administration.

I went back over my bank statements for the year to date, and looking at them, I can’t think of item that I personally purchase over the internet that was not already taxed that would not be exempt in Pennsylvania – except for iTunes. Not one. I’ve bought plants, clothes, books and furniture – and each of them were taxed when appropriate (PA does not tax clothing).

And when we recently bought our car after its lease was over (though not an internet purchase), we dutifully mailed in our check for taxes.

So this is not about the idea of sales or use tax.

I should be filing for those iTunes downloads. But filing for them – and paying the tax – is a crazy exercise in wasted time and administrative burden. The Use Tax Return in PA is not a consolidated, annual return; it is required to be filed by the 20th day after each MONTH in which a purchase is made. Oh yeah. Each month.

So, let’s do the math. I went through my bank statements and calculated how many returns I would be required to file and how much money I would owe for 2007. Here are the results:

June
Total purchases: $3.95
Total tax owed for June: $ .28

May
Total purchases: $16.83
Total tax owed for May $1.18

April
Total purchases: $ .99
Total tax owed for April $ .07

March
No purchases
Total tax owed for March 0

February
Total purchases $8.84
Total tax owed for February $.62

January
Total purchases $4.11
Total tax owed for January: $.29

There you have it. To pay tax on my iTunes, I would have to file six different returns to date – and paid the princely sum of a total of $2.44 (with six different checks).

How is that remotely efficient – on my end or on the end of Revenue?

If I had filed, I would have written six checks. And I would have paid $2.52 for postage – more than the total tax owed – to file those returns.

Also, in addition to my own time to prepare returns, as a taxpayer I would have paid to have a Revenue employee process six different returns – for a gross total of $2.44. Not even mathematically possible to break even under those circumstances.

Interestingly, Revenue allows taxpayers who owe less than $1 for personal income tax to skip payment; there is a similar rule for federal returns. These rules make sense.

I don’t see any such rule for Pennsylvania Use Tax (I poked around and poked around, if it exists, they sure don’t make it clear). Using that rule, I would have only been subject to tax in May.

For the record, I don’t advocate tax avoidance. I don’t disagree that sales and use taxes are to be paid. But the rules should make sense. A rule that requires a taxpayer to file a return and pay tax each month for between 7 cents and $1.18 (in my case) just make taxpayers crazy – and it would clearly overwhelm Revenue. If you want to encourage compliance, why not make the rules sensible?

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38 thoughts on “Use Tax On iTunes? It Doesn’t Make Sense.

  1. Honestly, I don’t pay attention to whether things have sales tax or not. And, I never knew there was such a thing as ‘use’ tax. Guess that means I could be looking at the 8×8 bungalow right next to you 🙂

  2. I’m with you – sensible rules = compliance. Simple as that. With that said, I’ll do some guest posts for you while you’re getting someone to post bail……

  3. Perhaps PA should do it like New York and Virginia and other States and add a line to the PA-40? New York even gives a method of calculating the tax based on certain assumptions. The one point that they do make in their instructions is that you are not to leave the line blank, and if you believe you owe none, insert a zero.

  4. Is there such a thing as a de minimis in US taxation? The paper & administrative work involved for the payee and the payor are not commensurate with the amounts & number of transactions involved.

  5. I live in Kansas, in Kansas, one pays and figures the tax as one line on the state income tax return done annually.

    But clearly the collection of sales and use tax in an internet economy is a challenge. I have never been a fan of tax on transactions. Governments need money most in economic hard times. If you depend on sales and use tax you end up with less income when you need it most, of course the same goes for income tax.

  6. Overdependence on sales tax — ya, that’s the big one here in Rhode Island right now. Bus ridership is ‘way up, because of the price of gas — but because the transit authority is funded mostly by gas taxes (which are down, because people are taking the bus instead of driving), they’re having to REDUCE BUS SERVICE! Apparently, it never occurred to our genius legislators that gas price hikes would have this result — they just said, hey, let’s make gas taxes pay for the bus system, and never thought it through…. oy.

  7. Another classic instance of not thinking things through. It seems to go on a lot in government. Yep these are the people we PAY to make decisions on our behalf.

  8. I think ITunes is charging me sales tax. I’ll have to check the last few receipts I have, but I seem to remember about a year ago they started charging me tax.

    Maybe because I’m in NJ?

    Thanks.

    Jesse

  9. Jesse,
    It would be interesting to see why Apple would charge sales tax in NJ and not PA. I’m wondering if they have some kind of warehouse or something in NJ that would render them liable to remit sales tax.

  10. shenanigans! This is not about Itunes-its about USE TAX.

    i think use taxes are America’s dirty little tax secret.

    in EVERY state with a sales tax (all but 5 states) and DC there is also a use tax that requires goods which are brought into the state-and have\ either not been taxed on sales elsewhere OR have been taxed at a lesser value than the in state rate-for you to return and remit it to the state. this applies to mail order or internet or phone orders equally. Its not a tax on the internet-its a use tax on out of state goods.

    Of course-if the in state sales tax wouldn’t apply-the use tax doesn’t apply. This means you need to go through the regulations and find out what items are taxed in your state and what are not.

    Counties and municipalities also sometimes add sales tax. So you could be liable just by shopping in a neighboring town. The exceptions to the local sales tax are probably also diffrent from the state sales tax.

    Some states require an annual return of this. Some states (like mine) require a quarterly return.

    If you forget one quarter-you owe fines and interest. In my state-you can be prosecuted for up to 7 years worth of tax.

    People have trouble filing their 1 federal and 1 state income taxes per year…imagine if people seriously filed this stuff! Imagine if you just learned about the use tax and now have to file 7 years worth of returns! imagine if there is a return every month (like in philly) imagine if there is also a county return!

    Good for you for havign the courage to admit you know about a tax your liable for but refuse to pay becuase its beyond stupid. Your admitting your committing a crime-and thats the only way people are going to get this information out to states to repeal this horrible situation. Currently, most people don’t know about it, and those who do are smart enough to realize that admitting they know about a tax they didn’t pay makes them a de facto criminal.

    I sent tax prof a email asking him to expose this sh**t but he didn’t reply. Thats why theres taxgirl!

  11. It’s interesting that apple doesn’t charge sales tax in PA. I assume you have apple stores there so they’d have a physical presence?

    Just for the record, I wouldn’t pay use tax either for the amounts you’re coming up with.

  12. Another Tax Geek, Yep, there are a few Apple stores in Pennsylvania – one is right across the river in Ardmore (darn you, Apple, for not putting one in Center City!).

    Interesting, when we purchase tangible items – like computers – Apple does charge us sales tax. But not for iTunes.

    Apple has a warehouse/facility of sorts a few hours outside of Philly that is responsible for much of the computer shipments. I wonder if they have somehow segregated digital music within the company in order to escape the tax?

  13. OK. I found a receipt from 12/31/2007 that I purchased 5 songs.

    Subtotal: $4.95
    Tax: $0.35 (My tax is 7%)

    Order Total: $5.30
    I never questioned it, because I thought this was probably just an overall ITunes shift in policy. I guess not.

    Jesse

  14. Technically yes you would have to account for the purchases since software sales (mp3s) are considered to be TPP and would hence be taxed on a destination sourced tax rate. For example New York recently encacted legislation requiring internet sellers such as ebay and amazon.com to collect sales tax.

  15. George,

    Good comments. I see this a lot too. There are huge misconceptions out there about how sales/use taxes work, and how they apply to out of state and online purchases. Here in WA, it leads to endless b**ching when people register cars in WA that were purchased out of state.

    I just wish state and local gov’ts would go after their citizens in their compliance efforts instead of trying to force out of jurisdiction businesses to collect on their behalf.

  16. Personally I think some one should write a program that would report each minute purchase one-item-at-time. Then we should all use this to overload the ridiculous tax systems designed to drive us all nuts by idiot bureaucrats.
    I hope all of these cities, counties and states go like Vallejo, CA, where they are going bankrupt!
    It is past time for a new Tea Party…

  17. Another Tax Geek,

    are you serious! you think people who go on a road trip or buy ink cartridges online should be prosecuted from not investigating whether those things would have had sales tax in their state or locality and then calculate what it is and remit it quarterly??

    suppose you buy ink from a guy online. you don’t know what kind of dealer he is. suppose he makes less than a certain number of sales per year and would be exempt from sales tax in your state and hence your exempt form use tax.

    how about people that drive across town and buy a can of soda in a locality without the additional 2% tax that applies where they live? should they fill out a return and report and pay the 5c they owe? should not doing this be criminal tax evasion (assuming done willfully-and the special intent required of normal tax evasion laws, which unlike most crimes, usually requires knowledge of the law) if not-should they be sued for their liability to the gov and forced to pay penalties and interest?

    how would you administrate this system in the case of children who buy things online with their own money and don’t tell their parents? the elderly who have their children do their taxes? the illiterate? etc..

    what if past purchases are no longer recorded? or recorded but the item purchased is not-so you don’t know whether it would be taxable?

    i think ONLY businesses out of state are in the position to collect and remit such use taxes NOT the individuals.

    sheesh

  18. George,

    Yes, absolutely serious, though I obviously realize it’s not going to happen, but this is all pie in the sky theorizing anyway. But yes, it’s fundamentally wrong for a gov’t to coerce businesses into doing their tax collecting for them AND have business bear the admin costs, burden, and risk of doing so, particularly businesses with no physical connection to that jurisdiction.

    You make somewhat reasonable points re complexity, but I think you’re missing a big one. Because they’ve offloaded the collection burden to business, politicians have been able to enact all sorts of unintuitive and illogical twists to sales taxes. Hiding this from consumers does nothing but perpetuate it. Changing the system to where consumers had to deal with the complexity and randomness of the would hopefully lead to change.

    You’re way off with your last paragraph though. Out of state businesses may be in a position to collect sales tax, but there’s absolutely no reason to. For example, I’m in WA. I can buy mail order from OR, from businesses with absolutely no physical connection to WA (and WA has sales tax, while OR has none). Why would they be willing to collect sales tax for WA? The tax is my responsibility, not theirs, so why would they ever willingly add such an admin burden to their business?

    Sheesh back at you.

  19. Another Tax Geek

    what i think your saying is that becuase this tax is currently only really enforced against business (if at all)-states can get away with charging it. if this tax was enforced against individual consumers-it would be impossible to administrate and hence would be forced to be repealed (or simplified to the point where it could be somewhat viable)

    furthermore its unfair/unconstitutional to businesses out of state to be forced to collect taxes (even if the tax is being charged to the consumer) to a sovereign they are not under.

    is this correct?

    if so, two responses:

    re: the repealing/simplifying idea…one would HOPE that if use tax suddenly became an enforced tax, that states would respond by simplifying the tax. But we all know that states do not always respond to such problems in the tax code.

    the use tax has policy benefits too. One is of course being fair to in state businesses and protecting them from lower taxed out of state businesses. Another is protecting state gov revenue.

    how would you simplify the use tax and still accomplish these goals. There are possibleties-but presumably it would tax years to
    work out compromises on that.

    re: the unfairness/legality of out of state business collecting against people in state:

    a) what about the privilege of doing business in our state? it seems fair that if gov x lets you do business with someone in my state by mail order and ship goods into the state that they should have the right to tax (or in this case-have you collect the tax from the buyer) for that privilege.
    b) suppose the out of state businesses is in a state that has a deal with the in state business (ex; WA and MD have a deal that they will each require each other’s business to collect. Now, the sovereign forcing you to collect the tax is your own-not the out of state sovereign. I believe this is the theory being the streamlined sales and use tax compact currently in the works.

    in short,
    actually enforcing this against individuals might relive business of admin costs-but it would impose impossible admin costs against individuals who would be unable to bear them,

  20. George,

    1. Yes, I’m saying that states are getting away with needless complexity, purely because it’s hidden from consumers. And further, that rather then grasping at new legal theories in order to force a business to do their work for them (NY and it’s ‘affiliate nexus’ theory), they should instead simply enforce their existing use tax laws. Of course, doing that would mean that they’d have to somehow educate their citizens of how sales/use tax laws actually work (and really, most people have enough grasp of the concepts to fundamentally realize they’re not buying something that’s exempt, but they’re just cheating the system. I seem to recall an article (WSJ I think) that mentioned that merely by adding a line on a state income tax return for use tax was enough to bring in more revenue.

    2. Use tax policy does not defend instate business from lower taxed out of state business. It protects revenue for the state, and protects local businesses who collect tax from out of state businesses who don’t.

    Given that use tax is a fact of life for business, I’m not sure why you think it’s so unworkable for individuals. For states with an income tax, add a line and supporting schedule to the income tax return, with an option for a ‘standard’ amount based on AGI, similar to the federal sales tax deduction amount. Monthly reporting is obviously ridiculous.

    3. What about the privilege of doing business in our state? See Quill. If I don’t physically enter your state, your state can’t make me collect sales tax. Obviously, if my state and your state have an agreement, the results change. But, that will never fully solve the problem, since states like OR, with no sales tax, have no reason to join the SST.

    Finally, use tax compliance by individuals is possible, and is done now in limited situations.

    Just for the record, I’m not, and have never advocated for aggressive use tax collection against individuals. But I argue strongly against states exceeding their legal power to force businesses to act as their tax collector.

    Kelly, my original post to you was somewhat tongue in cheek. I don’t file personal use tax returns either. But then, itunes collects sales tax from me.

  21. i think that business are in a position to calculate and administrate complicated regulations better than individuals are. I don’t really see how you can deny that. even small businesses typically hire accountants for things. Most individuals do not.

    now,
    i would be happy to support an estimate based on agi similar to the current situation where you have the option on your federal income taxes to take a state sales tax deduction based on agi or take your actually state income taxes paid…since I would support anything other than having individuals actually collect records of their actual use tax and report it.

    unfortunately, that doesn’t protect local business from out of state busioness that are taxes locally. If a consumer knows he is not going to pay the actual tax-but just an estimate based on his agi-and he will pay that same amount no matter what-then there is agian an incentive to buy from the lower taxed vender.

    on the other hand it would protect state revenue.

    i would think that if it were so easy to change policy to the yearly agi estimate-then all states would have done so already.

    2.im not doubting that there are limited circumstances of actual use tax compliance by individuals in this country (im happy to take your professional word for that). Out of pure, non argumentative curiosity however, id be greatly interested to understand what an example of that would be.

  22. Actually, with how the recording companies act on the “sale” of music, is what we’re getting actually tangible personal property? I’ve heard in the context of prepackaged software (think retail copies of Windows 7 vs. custom-written software) that even though the agreement states that the software is licensed, not sold that it is tangible personal property for sales tax purposes.

    @RenGarcia There are plenty of de minimus exceptions in the IRC including Form 1040/A/EZ itself having a minimum gross income before filing is required.

    @taxgirl Maybe my professors are behind the times but isn’t tax avoidance using legal means to reduce tax owed (like a 1031 exchange) whereas tax evasion is illegally evading tax owed at the time of conduct? Or is there a new, more acceptable term for structuring so as to pay no more tax than required by law?

  23. Tax avoidance is not a term I’d ever use in a positive manner. Despite how Wikipedia chooses to define it, the IRS uses the term to generally refer to abusive schemes. I’d argue that paying no more tax than required by law is called tax planning…

  24. Can you point me to the place in the tax code where it says I have to pay use tax *monthly*?! I’ve known about use tax for awhile, but I always paid it at the end of the year, along with the rest of them, as the form provided. I buy a lot of stuff over the internet and just keep the receipts to reconcile at the end of the year… but if I need to pay monthly, well, that changes my whole game. Please let me know where I can find this in the written laws!

  25. Ah yes, sorry–meant to say I’m in PA, too. Moved here a couple years ago and have been continually flummoxed by the state’s crazy bureaucracy. >.<

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