The upside of downloads.

• Author: Mooneyham, Scott
• Position: CAPITALGOODS

"If you take a walk, I'll tax your feet ..."

So far, Tar Heels have avoided the fate predicted by The Beatles in their 1966 hit "Taxman." But North Carolina might indeed tax your index finger when it clicks a button to get a song off iTunes or an online movie offering. State legislators are considering a proposal that would subject Internet downloads--right down to ring tones on cell phones--to sales taxes.

"It's reacting to electronic realities," says Rep. Paul Luebke, the Durham Democrat who co-chairs the powerful House Finance Committee. The reality to which he refers is the increasing appetite of a tech-sawy world for music, movies, electronic books and computer software via Internet download. After all, why drive to a bricks-and-mortar store or even bother to order some oldfashioned disc over the Internet when you can have it now, through cyberspace and the cables leading to the back of your computer?

In 2007, digital sales accounted for 10% of music sold worldwide. By 2014, downloads are expected to account for 40% of the market, according to In-Stat, an online publication that follows digital communications. Here's the rub: Every time someone downloads software instead of buying a disc that you plug into a computer drive, state and local governments see their sales-tax base erode a few cents. Internet downloads haven't been considered tangible goods subject to state sales tax.

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A "digital tax," already in place in 17 other states, would change that. If approved by the General Assembly, fiscal analysts estimate, the tax would bring in about $12 million a year, with roughly $4 million going to local governments and $8 million to state government. That's minuscule compared with annual sales-tax collections totaling $5 billion. But the number will rise as the technology becomes more dominant in the marketplace.

Brooks Raiford, head of the North Carolina Technology Association, says legislators should be aware of unintended consequences as they consider their digital tax. His group, which promotes high-tech business, has yet to take a position on the proposal. That's because the legislation is still a work in progress, he says. Even so, he's leery of the idea. Taxing downloads, he says, could send a signal that North Carolina isn't welcoming to the computer-technology industry, something the state can't afford in a down economy.

"Tax credits and tax breaks are used as an incentive for hehavior--marriage, buying a...