VA Senate Seeks To Kill The Digital Goose for Its Golden Egg

The last time the General Assembly made a similar mistake with the Virginia tax code was 20 years ago. It was 2004, and the complaints that business was not “paying its fair share” came from Republicans in the House. They introduced and quickly pushed through a bill that stripped sales tax exemptions from multiple categories of business. Sound familiar?

Twenty years later the only thing that has changed is that the bad idea is now coming from Senate Democrats. The anti-business rhetoric sounds the same. The sales or use taxes of 6-7% they seek to impose on business-to-business digital transactions (goods and services) will reach into every Virginia company, large and small. It will simply be passed along in higher prices. The only winners are their out-of-state competitors who have no such taxes in their states.

Doubt it? If you are a Dominion Energy customer, pull out your last bill. There is a line item under “non-bypassable charges” that reads “Sales and Use Surcharge.” That is one visible reminder of the 2004 debate. The sales tax exemption enjoyed by utilities on their inputs was one of the few repealed, and the utilities just added it to your bill, rich and poor, residential and business customers alike.

The Senate Democrats’ plan will make that a much bigger number on your monthly bills.

The 2024 proposed digital tax on business transactions, now dubbed a “tech tax” by its opponents, needs to disappear from the final budget when the Assembly finally gets one. The Tax Foundation last week put out another statement warning about it. But what everybody should have heeded was a study produced by the same group a year ago.

The author was Jared Walczak, who used to work as a legislative aide at the Virginia Capitol so is well known here. He was writing about an ongoing study group at the Multistate Tax Commission trying to provide some parameters for expanding the sales and use tax to the digital world.

But let’s be transparent about this: The real money isn’t in your Spotify account, your Netflix subscription, or that next Kindle book. It’s in digital controls, cloud computing, inventory management, automated production lines, digital payments, machine learning, software (and platform and infrastructure) as a service, digital advertising, and data processing.

In short, the basic project of defining digital products for tax purposes is to create a massive inventory of business inputs, many either untaxed or only partially taxable at present (whether in tangible or digital form), and to slip them into sales taxes that are supposed to be imposed on retail transactions.

Walczak all but predicted that an effort to impose a narrow sales tax on the digital economy would transform into a pyramid of digital value-added taxes on business.

The General Assembly is scheduled to adjourn Saturday, but to do so the conference committee seeking compromise between the two chambers on the state budget needs to finish its work. Given the Democrats just took the reins back with slim majorities, there is added pressure on them to demonstrate competence and command by finishing on time.

Both the House and the Senate Democrats accepted Republican Governor Glenn Youngkin’s idea of expanding the state’s sales and use tax to various digital goods and services, things now exempt as they are not “tangible goods” under traditional definitions.

Then they went their separate ways.

The biggest gap between the House and Senate budgets is created by the Senate’s decision to apply the sales tax on business purchases of those digital goods and services, which was not in Youngkin’s original proposal. That change added close to $1 billion in projected revenue, which the Senate promptly spent on highly popular items with strong constituency backing.

Behind the scenes, an epic struggle is probably underway. On one side is the business community that understands the depth of this tax increase on them, and its impact on profits and competitiveness. On the other side are those powerful advocates for higher government spending. Where the House of Delegates negotiators come down, well, that is the $1 billion question.

Governor Youngkin’s March 1 letter to legislators on his budget priorities implied a veto on the issue, but as lines in the sand go, he drew a faint one. His letter never specifically mentioned the damage such a tax would do to Virginia’s carefully honed reputation as a high-tech haven. The Chamber of Commerce, technology councils, and other corporate players were probably disappointed.

The Richmond Times-Dispatch highlighted how Youngkin was continuing to push his overall tax package in the letter, but it is not a major theme. His letter also mentions working with the legislature toward a consensus set of tax proposals to bring to the 2025 session, which will be his last.

A concentrated public push through the summer and fall of this year is the only viable alternative now, and that is how tax reforms – whether reductions or increases or a combination – make it to passage. Put the suggestion in the “better late than never” pile. If the effort is made, invite Jared Walczak and do not invite the Multistate Tax Commission.

But the Senate negotiators may ignore Youngkin this week and concentrate on winning over the House to this massive, ill-advised tax hike. Persuading Democratic delegates to spend another $1 billion should be easy. Then issuing a veto and making it stick is the Governor’s problem.

Steve Haner is a Senior Fellow for Environment and Energy Policy. He can be reached at [email protected].

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