The iPod Tax, the iTunes Tax and the Notepad Tax

The Conservative Party of Canada decided to turn a copyright controversy into an election issue. Last week it launched the website, slamming the opposition parties’ support of extending the private copying levy to devices such as iPods. The Tories’ claim is not factually accurate, as the Liberals currently oppose such expansion of the levy, and the main point of the campaign does not seem to be genuine concern about copyright. Rather, the issue is mainly an excuse/opportunity for promoting fear about general tax increases (“It’s just the beginning of the Coalition’s high tax agenda”), however, since I’m not a political commentator I won’t stray into these issues. Instead, I want to focus on the choice of the term “iPod Tax” and some of its implications.

Some context: Part VIII of the Copyright Act creates a special mechanism that makes it legal for individuals, under some conditions, to make copies of sound recordings for their own private use.  At the same time, the mechanism also permits the Copyright Board to impose a levy on blank audio recording media.  The levy is paid by manufacturers and importers of blank audio recording media to the Canadian Private Copying Collective (CPCC), which distributes the money among various other collective societies representing different groups of right holders.   The CPCC has tried twice to propose a levy on devices such as iPods (that’s where the $75 figure comes from).  The Copyright Board agreed, but the Federal Court of Appeal distinguished between media and devices and ruled that devices cannot be levied.

Another question is whether a blank audio media levy (whether or not extended to devices) is constitutionally valid.  One area of constitutional doubt is whether the levy is a “tax” or something else, such as a regulatory charge.  The distinction is crucial, because if the levy is a “tax” then it is likely constitutionally invalid by virtue of Sections 53, and 54 of the Constitution Act, 1867, providing that “Bills for appropriating any Part of the Public Revenue, or for imposing any Tax or Impost, shall originate in the House of Commons”, and requiring that such “money bills”  be preceded by a “Message of the Governor General” recommending their passage.  It is common ground that the private copying levy hasn’t met these requirements.  Even if it did, if the levy is a tax there might be a question whether the decision to levy and how much can be delegated to the Copyright Board, and whether a tax can be collected by and distributed to private entities.

In 2004 the Federal Court of Appeal considered some of these question, but found that the blank media levy is not a tax but a regulatory charge and therefore constitutionally valid.  The decision, however, is rather confused and confusing, so it is not unlikely that the constitutionality of the levy may have to be determined once again.  If the Conservatives form the next government and the constitutional issue arises again, it will be interesting to see whether the Government will stick to its “tax” terminology, which might require it to take the position that the blank media levy is unconstitutional.

Furthermore, if the Tories are really that opposed to the iPod Tax, then there is a long list of other copyright taxes that they should equally oppose to.  As a first logical step, they should oppose the current blank media levy, which is currently levied on CDs and other media.

Next, they should oppose to the “iTunes Tax”: the various tariffs that online music services such as iTunes have to pay to various copyright collectives when they sell digital downloads, over and above what they pay after negotiating directly with the record labels, and similar other tariff that probably stifle the entry and growth of many digital services in Canada.

In addition to the iPod, iPad and iTunes taxes, it would also be interesting to hear the Tories’ view about the “Notepad Tax” or the “Education Tax”, the proposed $45 per student that Access Copyright wants to collect academic institutions. The economic wisdom, legality and constitutional validity of this proposed tariff are highly questionable, but I’ll leave that for another post.


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2 Comments on “The iPod Tax, the iTunes Tax and the Notepad Tax

  1. Ariel, you are undoubtedly aware that a sound recording consists of two things: a musical composition (i.e,. a song) and a sound recording of a performance of that composition (i.e., a recording).

    You are also aware that songs and recordings are separate things, and that, in most cases, the song and the recording are owned by different individuals or companies. We call these entities “music publishers” and “record labels”, respectively. While many performers record their own compositions, there is no requirement that a work be performed or recorded exclusively by its creator. Many of the most famous recordings in musical history have achieved their success through recordings made by performers who did not write those songs.

    Yes, iTunes and other online services pay record labels for the reproduction and distribution of their recordings pursuant to negotiated agreements. The labels, however, do not own the musical compositions underlying their recordings. When a copy of a recording is sold by iTunes, a reproduction of the recording is made on the buyer’s computer. iTunes pays the label for the making of that copy. In the process, a copy of the underlying musical composition is also made on the buyer’s computer. iTunes pays separately for that reproduction.

    That’s because when a record company licenses its songs to an online music distributor like iTunes, it does not license the reproduction of the underlying musical work; the label has no authority to license the reproduction of the song. In Canada, that right is licensed by the copyright owner through a collective, CMRRA-SODRAC Inc. (CSI). CSI represents, as I think you know, almost all of the songs in use in the Canadian market.

    CSI licenses these songs pursuant to a Tariff certified by the Copyright Board. Such certification takes place after a highly contested public hearing. You can read the decision of the Board, in the event you are not familiar with it, at

    You suggest that the need to pay for the songs is stifling the entry of online services into the Canadian market. Well, I suppose that more companies might enter the market if they didn’t have to pay for the songs at all. On that basis, even more might be persuaded to enter the market if they didn’t have to pay for the recordings, either. Neither suggestion makes sense. You can’t build a market by forcibly depriving the providers of the underlying rights of their right to compensation.

    In every country in the world in which online music distribution services are doing business, they pay the labels for the recordings and the song copyright owners for the use of the underlying songs. In some cases, such commercial arrangements are achieved through contracts; in others, through collectives. In some cases, licensing is carried out subject to a statutory license; in others, terms are arrived at through negotiation or through the intercession of a tribunal or board. But in no case do the songwriters go unpaid – except, of course, in the case of file “sharing”, which is carried out in the absence of any permission, licensing or payment of royalties. We think that is a bad thing.

    There is no “iTunes tax” – except, of course, the HST that is charged on every sale. And that amount is collected by the government, not be copyright owners.

    David A. Basskin

  2. David,
    Of course I’m aware that the sound recording and the underlying musical composition are different things and that the copyrights in each are separate and can be owned by different entities. And nowhere am I suggesting that the labels should be paid but not the songwriters (or that no one should be paid). The question is what’s the efficient way to get the songwriters paid: is there a reason why the market cannot make sure that all right holders are paid, or do we need to get the songwriters paid outside the market, through a system tariffs, levies, which are, effectively, taxes.

    I’m sure that you’re aware that in the US–and correct me if I’m wrong about that–Apple gets all the necessary rights to sell songs on iTunes from the labels with which it negotiates directly. And the labels can give Apple such permissions with regard to the musical composition because when the song was recorded, the songwriters authorized the label to license their further reproduction. Then, when the song is sold on iTunes, Apple pays the label its share according to the contract between the label and Apple, and the songwriter gets its share according to the contract between the songwriter (or its publisher) and the label. All right holders get paid because the market works.

    The reason why the market doesn’t work north of the border is not because the economics are different. The reason why the market doesn’t work in the same way is that in Canada the songwriter/publishers exclude some rights from the bundles they authorize the labels, and let different collective administer those rights on their behalf. The collectives–as you know–can then go to the Copyright Board and ask the Board to determine the what Apple should pay in the form of a tariff, and the tariff (almost by definition) will be higher than what the songwriters/publishers would get if they acted via a competitive market. As a result, Apple has to pay not only what it negotiated with the labels (which could include a payment to the songwriters) but at least two additional tariffs, which are effectively taxes. These taxes add up and the result is a market that is less efficient. It benefits the recipients of these supra-competitive license fees, but hurts the rest of us.


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