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Microsoft may pay Zune tax twice

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Microsoft's private deal with Universal Music to pay the record label a voluntary royalty of $1 for every Zune player it sells has raised eyebrows across both the technology and music industries. But it might not be the last payment Redmond owes from Zune, we've discovered.

Recently, Steve Gordon, entertainment attorney and Reg music columnist, took a skeptical look at where Universal's Zune dollar might end up. He reminded us of a little known US tax, which harks back to the "Home Taping Is Killing Music" era. Under the Audio Home Recording Act of 1982, recording devices carry a small royalty which is then divvied up between the performing artists involved. The royalty is administered by the Alliance of Artists and Recording Companies, AARC.

(Steve explained the details here.)

You don't hear too much about AHRA or AARC, because as a consequence of a 1999 court settlement over the Diamond Rio player, it's generally assumed that all MP3 players are exempt.

But not so fast, AARC's executive director Linda Bocchi reminded us.

"People tend to throw that Rio decision around a little haphazardly," she told us. "Rio didn't say that all MP3 players are exempt. The decision was based on the fact the Rio could not record unless via the hard drive of your computer."

"But Zune is going in another direction. People can record off of FM radio, and share from one Zune player to another. It's moving away from the direction set by the iPod, and it's a grey area."

In fact, the portable players that record digital satellite radio in the US - sold by XM and Sirius - already pay an AHRA, says Bocchi.

Steve Gordon explained that XM Radio pays the labels for the music by paying SoundExchange under the DMCA compulsory license. XM also pays the labels for every INO player under AHRA.

"But the labels argue that just because they are paying for the device through AHRA, XM must pay a third payment because the INO does more than what the AHRA contemplated - such as the ability to make personalized play lists."

So is Microsoft be obliged to pay an AHR Act royalty, too?

For now, it's a case of wait and see, said Bocchi.

AARC must wait to see if Microsoft pays the royalty voluntarily, which its obliged to do under the Act, and this may take some months.

"We're watching, and there are situations where we can step in. I'm not saying we're going to, but I can see argument where we could discuss this with my board and we would decide what to do."

AARC administers around $5m worth of royalties a year - "not a huge amount", said AARC's executive director but it's an amount that's increasing.

We rang the Zune team to see if Microsoft thought the player fell under the AHR Act - but they didn't get back to us in time for publication. We'll update you if and when they do. ®

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