Your Tax Dollars at Work Part 2: The Barter iTax

“File sharing” is a term that entered the popular vocabulary as a bit of double speak about 10 years ago to put a “feel good” spin on behavior that was unauthorized at best. As one ISP executive succinctly put it in an e-mail: “….‘piracy’ is a loaded term. Could we say ‘sharing’ – ‘piracy’ implies there’s something wrong with it. Think of it as helping the health and good living of rich cocaine-sniffing rock stars by leaving them with less free money to spend on sex and drugs.” (His company subsequently adopted the near-standard “3 strikes” policy.)

However you feel about the term and the behavior it describes, “file sharing” networks clearly are intended for the exchange of music, film, books, illustrations, photographs, song lyrics, needlepoint, whatever–“ripped” originally from a legitimate device that permits the “ripping”. The “file sharing” networks increase in popularity with a steady inventory of files being made available for “sharing.”

This means that a “file sharing” network is really a marketplace in which “file sharers” come to “share” files, meaning that they upload a few and download a few. This is also known as “barter”. (Albeit on a black market, but that’s not a tax issue.)

Those who use the term “file sharing” typically get nervous when you start calling it “file bartering”. “Barter” sounds like trading beads for Manhattan, barter sounds like something commercial, something where each side gets something for the exchange of something else (also known as consideration), “barter” sounds—oh, I don’t know…taxable.

New York Governor David Patterson included a 4 percent sales tax on digital goods in his State budget. The tax is on downloaded music, ring tones, movies, books, photographs, and games, among other online items. Sounds like the same stuff as is traded on file bartering networks, yes?

As Mark McKinnon recently noted in a piece on the Governor Patterson’s “iTax”: “Add a tax to broccoli, and you’ll sell less broccoli; there’s no convenient, underground tax-free broccoli market. But add a tax to digital goods, and you won’t just discourage consumption of legal downloads; you’ll push people in the direction of the easy, free alternative: illegal file-sharing.”

This is, of course, exactly correct. Unless there were a counterbalancing tax on the underground broccoli market.

I would suggest to the governor that if he wants to make the real money, he needs to tax file bartering networks operating in New York State on the fair market value ($1.29 for music downloads) of each of the digital files being bartered. The file bartering networks can choose to pass on the tax to their users if they like.

A barter tax doesn’t require any lawsuits about copyright infringement. Whether User A has the rights to the beads they trade for the island owned by User B, or whether User B owns the island she trades to User A is of no import. That’s between User A and User B to figure out, possibly with the help of the lawful owner of the beads. The state makes little inquiry into who holds proper title to anything that it taxes. When they charge you the parking tax, they don’t ask if you own the car.

The state can still tax the beneficiary of the transaction—the p2p or Bit Torrent software owner or operator who gets the benefit, i.e., either the upstream beneficiary in the hybrid economy (like YouTube or Limewire) or the downloader. Or the more findable one, probably the operator. This isn’t a question of who has liability for copyright infringement, a much murkier issue. This is very clear cut–there’s a tax and the state will put the collection and record keeping burden on the one most likely to pay at the lowest compliance cost. (The state could allow all employees to pay on a 1099 basis, but they don’t.)

Some file bartering networks are easy to find. Limewire’s DMCA agent is:

Lime Wire LLC
377 Broadway Fl. 10
New York, NY

Some are not so easy to find, but finding a taxpayer has never been much of an impediment to imposing a tax. The tax enforcement folk can probably take care of that problem without too much trouble. And then there’s YouTube.

And if the file bartering networks can’t be found by tax enforcement professional investigators, I guess they’d have to keep an eye out for the owners if they ever pass through–or maybe over–New York.

Aside from the externalities created by the iTax that Mark McKinnon correctly notes, the Governor should go for the real money and maybe do some good in the process.

And let’s acknowledge for once what is really going on–trading of goods in gigantic swap meet. And before we hear from the Cassandra EFFluviati wringing her hands about how “this won’t stop the beloved file sharing”, the barter tax isn’t designed to “stop” file bartering. It’s designed to slow it down and to make somebody pay something for their actions. You can download away and thumb your nose at your favorite artist, you can thumb your nose at that artist’s producer, road crew, booking agent, manager and their respective families, you can express your disgust with the record company of all of the above, you can even thumb your nose at US attorneys and say catch me if you can–you can do all that. But remember that thumbing your nose at the IRS has not worked out very well for certain people in the past. This would just be one more of the thousand cuts, albeit a pretty important one. The free riding has to stop.

There’s no such thing as a “free culture”.

3 thoughts on “Your Tax Dollars at Work Part 2: The Barter iTax

  1. “Some are not so easy to find, but finding a taxpayer has never been much of an impediment to imposing a tax. The tax enforcement folk can probably take care of that problem without too much trouble.”You’re brushing the biggest flaw in this plan under the rug. These systems haven’t been centralized since the days of Napster. No one owns these networks. They merely build software to access them. It’s like trying to levy an Internet access tax against Mozilla, Apple, and Microsoft.Barter exchanges are taxable (,,id=113437,00.html), but I’m fairly certain that Limewire wouldn’t qualify. Taxing the downloader could work theoretically, but how are you going to get people to report illegal downloading on their tax returns?


  2. First of all, given all the changes in the law currently going on to protect state and local government from bankruptcy, it shouldn’t be too hard to fine tune the law to fulfill the policy goal of a barter tax.If the tax is imposed on the creator of the software (or, for example, any software program that is autoupgradable, so there’s a connection of some kind between developer and user), it is much simpler to see the conduit. But it’s not like these people cannot be found, particularly by the government.It is the responsibility of the retailer, or swap meet owner, to make sure the sales tax is colelcted and paid. How that cost is passed along is up to the retailer. The swap meet owner doesn’t own the building or grounds the swap meet assembles in, either. Ownership isn’t the criteria for being taxed.Tax authorities have heard all these arguments before and they just don’t seem to work very well, starting with Al Capone. I never heard of a tax authority that let someone off because they’d done a good job of hiding themselves–oh, you’re such a rad hacker, you win! Sweet!It’s amazing what an IRS search warrant can turn up. Speaking of, if there’s a search warrant, anything else they find is admissible if the looker is lawfully in the looking place. So as I once said to a young man who operated one of these illegal distributed services, look me in the eye and tell me that you know with absolute certainty there’s no evil being done on your network that might be discovered by someone serving a search warrant. He couldn’t do it.California, by the way, already has a provision on their personal income tax form for this kind of thing.


  3. Well, that’s the thing. It’s actually relatively easy to identify people operating on a p2p network, just by looking at the amount of traffic. (Comcast and Cox have been doing this for years.)The problem is that as soon as you do that, you get the privacy fetishists all excited. “ZOMG SNOOPING, PRIVACY FIRST AMENDMENT, VIOLATION!!!!” (I paraphrase somewhat, but this is the substance of their comments.) As long as we cling to the notion that our online activities should be sacred, inviolate, and immune from eavesdropping, then it will of course be impossible to identify file-sharers. But not because it’s literally impossible. It’s impossible because we have decided that it ought to be.


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