The MTC is redefining digital goods taxes

While the taxation of digital goods is addressed by most states, and is reflected in their tax legislation, most of that legislation is 20 years old, and contains differing definitions of digital goods. The Multistate Tax Commission and the Streamlined Sales Tax Governing Board have created study groups to explore digital goods definitions that are in the law today, and examine whether they are sufficient for the present, let alone the future. 

Gil Brewer, senior assistant director of tax policy at the Washington Department of Revenue and chair of the MTC work group, has proposed that a broad-based tax on the final sale of digital products is one method for states to raise adequate revenue to allow for an exemption for taxable items purchased by businesses. 

This is noteworthy due to the fact that the business lobby has been a key blocker to the meaningful progress in taxing digital products, according to Scott Peterson, vice president of U.S. tax policy & government relations at Avalara. 

A recurring theme in the conversation around taxing digital products is the impact it has on business consumption, he remarked: “Often when states talk tax policy, they talk about rates and how to spend the money. This time around, the business community is questioning the need for states to redefine definitions, and it notes that, when it comes to digital goods, services and software, businesses are a very large buyer of these things. Of the total money spent in the U.S. on software, an overwhelming amount of the total comes from businesses buying software.”

“Businesses stress the fact that tax is pyramided,” he said. “Sales tax is built into products that companies will sell, and sales tax is again applied to those products at the time of sale. Many observers believe that the system should not encourage the pyramiding of tax.”

The decisions on taxing business purchases of digital products should be made ahead of time, according to Brewer and the MTC work group on taxation of digital products.

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“If you want to exempt business consumption, do it at the outset and not after the fact,” explained Peterson. “For example, per the MTC proposal, consider imposing a broad tax on digital products and exempting business purchases, thus eliminating the strongest opposition lobbying group to digital product taxation. A huge amount of sales tax comes from business purchases.”

Nearly all states tax business purchases across the board, he noted, with some rare exceptions, and even in those cases, the purchased item must be used primarily for a business purpose before it can be exempt.

So, for instance, in California, farm equipment must be used 50% or more of the time in commercial agricultural production or harvesting — and lawsuits abound across the country where farmers try to not pay sales tax on equipment, Peterson noted. 

“In these suits, a judge has to decide on whether a piece of equipment is agricultural,” he said, “The only real examples of states not taxing business purchases are in manufacturing and agriculture — all other business purchases, [such as laptops] are subject to sales tax.” 

The MTC will meet in November to further discuss the proposal, according to Pererson. “They’re not done yet,” he said. “I believe the proposal has legs. Once MTC has made a proposal, states can decide for themselves on how to act. About 30 states tax digital products today, and states are watching the MTC guidance to determine if they have the right definitions in place for the present and future.”

Over the years, states that have not changed digital products definitions have therefore shrunk their tax base, according to Peterson. He cited the delivery of music products as an example. 

“Recall that LPs were tangible personal property when we purchased them,” he said. “Delivery of music has changed radically, and some states haven’t adapted their definitions, resulting in lost revenue.”  

“Moreover, lots of politicians want to rely on sales tax for revenue to pay for what they plan to do,” he said. “This adds additional steam to the MTC’s evolving and elegant proposal for states eyeing broader taxation of digital products.”


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