By Steve HanerThe Virginia General Assembly has now jumped into the brave new world of taxing the digital economy, but the sales tax provisions it adopted in the budget conference report Saturday are not the same ones that appeared in earlier budget versions. The cabal of tax raisers in the secret final negotiation got creative. As the final budget negotiations began, the House of Delegates and Senate budgets differed on the key point of whether to exempt businesses from paying sales and use taxes on a host of digital services and goods. By extending the tax to business transactions, the Senate proposed to collect about $1 billion more for its spending plans. The tax amendment both bodies approved Saturday agreed with the Senate position of extending the tax onto business transactions but did not include the full list of digital services that will now be taxable for individuals. The business taxpayers will only have to pay on “software application services.” If this budget provision survives and becomes law effective July 1, beginning in 2025 individuals will also have to pay on “computer-related services, web hosting and design, data storage, and streaming services.” Those are on top of the various digital products that more closely parallel traditional tangible goods, such as a downloaded movie or book. The final draft adds very consequential language about how to tax bundled transactions of both goods and services, paragraphs that appeared in no version during the regular Assembly process. And it loops in Virginia’s existing sales tax on communication services, which was the state’s first foray into taxing services when approved more than a decade ago.Both are complicated provisions — substantive changes in tax policy, that were sprung on outsiders as a surprise when the conference report was revealed late Thursday. In the 48 hours before the vote, no full analysis emerged. During the brief floor debates, neither issue was a topic. The infamous law of unintended consequences will be in full play. The new code section on bundled services can be found in the text at §58.1-603.3. Then the bundled transaction language is applied to the communications sales tax at §58.1-650. If a different tax rate would normally apply to different parts of the transaction, the higher of the two rates could be imposed on all of it. For the average taxpayer, these details will be gibberish. They will simply pay more tax on scores or hundreds of annual purchases, and in most cases will never notice the sales tax buried on the bill. But for Virginia’s business community, the details will matter, and the coming process to develop guidelines at the Virginia Department of Taxation will be fraught with peril. Only a half dozen or so other states already tax digital products and services, and their rules on how to treat business to business transactions vary widely. Republican Governor Glenn Youngkin is strongly opposed to what just happened, and the sales tax base expansion is the main reason 14 Senate Republicans and 37 House Republicans voted nay on the conference report Saturday. Youngkin is correct in his assertion that once it is fully in effect, it costs taxpayers about $1.5 billion per year. It also increases the cost impact on taxpayers of the bills on his desk allowing an additional 1% sales tax bite for local school capital projects. But by burying the issue in the budget, something Youngkin did to himself, he complicated his ability to simply veto the budget item outright. There have been legal arguments in the past over gubernatorial vetoes of budget language, and now such a veto would have to be accompanied by a detailed list of major spending reductions. To repeat a line from two months ago: “The dilemma the governor will face in the final budget showdown in March is obvious to everybody who has a cursory understanding of how the budget process works.” In the brief floor debates, Republicans did point out that the sales tax is regressive, in that it takes a larger chunk out of the incomes of lower- and middle-income taxpayers. In recent years Democrats have postured that they want to make Virginia’s tax code less onerous to the poor, but the 2024 session will make our tax code more onerous. To steal a song line: a pocketful of mumbles, such are promises. More telling was a colloquy Saturday between Delegate Lee Ware, R-Powhatan, and Delegate Vivian Watts, D-Fairfax. Ware had been chair of the House Finance Committee, Watts is now. Ware’s questions illustrated how that committee has totally lost its authority and how the big spenders of the House Appropriations and Senate Finance committees have grabbed all that power. Until just a few years ago, the power to tax and spend were centered in different committees, at least on the House side. And even on the Senate side, the rules worked to keep taxing and spending bills separate. A standing rule specifically required that any bill on revenue issues had to clear committee and the full floor vote first — in effect deciding the revenue amounts before the spenders got their hands on it. A line appeared on every session calendar, designating a deadline for “Committees responsible for revenue bills to complete work by midnight,” in advance of the budget bills. That line is now gone from the calendar and the spending foxes are in total command of the taxpaying chickens. The separate revenue process is also undermined by this growing practice of embedding tax bills into the introduced budget. Legislators are not ones to surrender power, as all the failed 2024 campaign finance reform efforts proved once again. The passage of this massive tax policy revision within the budget bill, with the final language only appearing in the final hours, cements the future practice. It is one more reason Virginia is increasingly considered less and less a stable, reliable place to do business. First published this morning by the Thomas Jefferson Institute for Public Policy.
The Sausage Factory Taxes the Digital Economy
Share this article
ADVERTISEMENT
(comments below)
ADVERTISEMENT
(comments below)
Comments
40 responses to “The Sausage Factory Taxes the Digital Economy”
-
“the spending foxes are in total command of the taxpaying chickens.”
In my experience the times it got nasty in the GA were years when there was not enough money for them to spread around. Turning the process around so the spenders are in the drivers seat goes a long way towards ensuring that the lege will be a pleasant place for all. Except of course those of us who have to pay for it.
-
“the spending foxes are in total command of the taxpaying chickens.”
In my experience the times it got nasty in the GA were years when there was not enough money for them to spread around. Turning the process around so the spenders are in the drivers seat goes a long way towards ensuring that the lege will be a pleasant place for all. Except of course those of us who have to pay for it.
-
Why does Article IV, Section 12 of the Virginia Constitution not prohibit tax bills being inserted into budgets?
While related to one another, taxes and spending are separate objects.
-
The single object rule has been ignored on the budget bill for a long time. Sadly I don’t see any court reining them in. But this item is likely to be vetoed and he could cite that.
Lefty, gee, yeah, I guess keeping the session peaceful is the higher good. 🙂 Not.
-
Yeah 🙂 back atchya. I’d just never bet against the pols figuring out how to make themselves comfortable, especially when they can do it using our money. I’d also bet against the Gov vetoing for the same reason. Repubs benefit right along with the Dems.
Guess I need to get ready to collect sales tax on the applications software I write and lease. At least it will not add to my net income and my customers will deduct it as an expense. That will slightly defray their additional cost.
-
Yeah 🙂 back atchya. I’d just never bet against the pols figuring out how to make themselves comfortable, especially when they can do it using our money. I’d also bet against the Gov vetoing for the same reason. Repubs benefit right along with the Dems. He may grumble a little, but no veto.
Guess I need to get ready to collect sales tax on the applications software I write and lease. At least it will not add to my net income and my customers will deduct it as an expense. That will slightly defray their additional cost.
-
-
-
There is a reason only 6 of the 50 states have this kind of tax.
-
Do you know the 6 that do?
-
Not my research, but I was told Iowa, Connecticut, Maryland, New Jersey, Wisconsin and Washington.
-
-
-
So I read this and not being as astute as Mr. Haner on the GA, I had questions:
“Lucas and House Appropriations Chair Luke Torian, D-Prince William, blocked Youngkin’s “package deal” meant to provide a net $1 billion tax cut by reducing income tax rates by 12% and increasing the sales tax by 0.9 percentage point. Their committees kept only his proposal to apply the sales tax to digital services and then they expanded it in a budget compromise to include business-to-business purchases of software application services, resulting in an estimated net $1 billion tax increase.”
“The General Assembly is using the additional revenue from the reversal on tax policy largely to increase state funding of K-12 public schools by an additional $1.2 billion and provide raises of 3% each year to teachers, state employees and state-supported local employees.
It restored money to higher education for financial aid and to limit increases in tuition. It raised Medicaid rates for services to needy Virginians. It boosted state funding for a mass transit system serving Northern Virginia, provided toll relief for drivers in Hampton Roads and promised money for improvements on Interstate 81.
“We found a way for everybody to win,” said Sen. Jennifer Boysko, D-Fairfax, who chairs the Senate Transportation Committee.
Not everyone likes how the assembly is paying for it.”
I was trying to figure out how Youngkin was going to offset the sales tax increase with a tax cut and still be able to pay for the teacher and state employee raises, higher ed tuition, Medicaid,
Did his budget fund some things but not all the Dems did?
-
I said in the column he’d need to also provide a list of what he’d cut. Hence the word dilemma.
-
-
I’m still confused by:
If this budget provision survives and becomes law effective July 1, beginning in 2025 individuals will also have to pay on “computer-related services, web hosting and design, data storage, and streaming services.”
Web hosting, data storage, and streaming services are “as a service” products that can be automatically purchased and shut off. Web design is usually a consulting type service. It involves a customer talking to a vendor who understands their desires and works to design the web [site] the customer wants. Rarely is that done for individuals although it is common for small, medium and large businesses. That seems like something that doesn’t belong.
As for the need to raise taxes to give K-12 government school teachers a raise, aren’t enrollments in government schools shrinking in Virginia?
In January of this year, the following column appeared in BR:
https://www.baconsrebellion.com/birth-dearth-portends-continued-public-school-enrollment-losses/
A 40,000 student decline represents more that 3% of the total enrollment in Virginia government schools.
Why not take the savings from lower enrollment and redistribute those savings to the teachers who remain?
Why does there need to be new axes for that?
Once again, I believe The Imperial Clown Show in Richmond™ is trying to gaslight the people of Virginia.
-
Teacher and State employee raises…..
The “redistribution” idea – think about how that would “work” since it’s at the local level that decisions are made about school closures and fewer teachers.
What I WOULD support is to increase the standard deduction for Virginians to help offset the increases.
Will NoVa tech firms flee to Md and NC because of this tax? That’s something that DJ might well have some insight about!
-
Back to first principles.
If there are 100 teachers each making $100 per year, the total budget for teachers’ salaries is $10,000.
Enrollment drops by 5%. Now there are 95 teachers making $10,000.
Each teacher now makes $105.26 per year.
Neither the state nor the localities need to raise taxes to give the remaining teachers a raise.
-
On paper, yes. In reality?
How many SOQ-funded teachers are reduced?
My quess is that at the local level, if there is a reduction, they will reduce the locally-funded teachers first and the state-funded SOQ teachers last.
In terms of “raises” the none-SOQ teacher raises have to be funded totally at the local level with no help from the state.
So how many actual SOQ-funded teachers went away such that the GA could act on in the budget?
-
-
-
Mr. DJ you are on to something in regard to K-12 spending. In Fauquier, 26% of the school age population does not attend public school. And here we are listening to the school board whine for the most money they have ever asked for.
-
Is it really necessary to gaslight low-information voters?
-
ow
-
Necessary? No. But, it’s hard not to.
-
Ok, I’ll bite … how did my comment gaslight low-information voters?
-
Not you, The Imperial Clown Show in Richmond™. Is it necessary for THEM to gaslight the low-information voters that elect them?
-
Got it. Thanks.
-
See my edit, I used the proper term of address for them.
-
-
-
-
-
Decreases in student enrollment do not necessarily translate into lower costs to run schools. The enrollment loss has to be significant enough for the school system to have fewer classrooms. After all, a third-grade teacher with 18 students in class costs the same as one with 28 students. Some rural areas with declining populations have decided to close some schools after this year. https://www.wdbj7.com/2024/02/29/franklin-county-school-board-votes-close-two-schools/
-
But it certainly doesn’t cost any more to run the same number of schools. And fewer students should definitely mean fewer teachers.
Fewer teachers dividing the same salary pie ought to result in a raise.
-
The state is largely funding only SOQ positions which most schools need to keep so they’d be shedding non-SOQ teachers if they were downsizing.
I dont think there are necessarily any major savings for the State when there are fewer teachers if they are not SOQ-funded positions.
The locality will shed the ones that are not mandated SOQ and save the locality the full salary. They’ll keep the SOQ-funded (state funded) positions.
-
-
-
Decreases in student enrollment do not necessarily translate into lower costs to run schools. The enrollment loss has to be significant enough for the school system to have fewer classrooms. After all, a third-grade teacher with 18 students in class costs the same as one with 28 students. Some rural areas with declining populations have decided to close some schools after this year. https://www.wdbj7.com/2024/02/29/franklin-county-school-board-votes-close-two-schools/
To steal another line from Mr. H’s song:
“All lies and jests
Still a man hears what he wants to hear
And disregards the rest
Lie la lie”
Our friends in Richmond no longer work for the people. Good article. Enjoyed and understood it.
-
Had a full S&G set on during my AM workout and it ran through my head all day. Where the %$## is their Nobel Prize for Poetry?
-
and the chorus continues…
…lie la lie la lie la lie
Lie la lie, lie la lie la lie la lie, la la lie la lie
I think Mark Warner was the first governor to include changes in the tax code in the budget bill. From a public policy perspective, it is a bad practice. However, as Youngkin demonstrated this year, governors of both parties do it.
As you point out, Youngkin has some decisions to make. If he wants to negate the tax increase, he will also have to make corresponding cuts in spending. All those folks counting on that extra spending will be upset.
Technically, he has a problem, as well. For the reconvened session, he can send down amendments stripping the tax increase from the budget while reducing new spending by $1 billion. The Democrats have the votes to reject those amendments.
The governor still would have the option to veto the tax language after the General Assembly sends the bill back and adjourns the veto session. At that point, the GA would not have the opportunity to override the veto and the Democrats do not have the votes to override a veto anyway.
Vetoing the language is one thing, vetoing $1 billion in expenditures is another. The interpretation by the Va Supreme Court regarding the governor’s budget item veto power probably would make it impossible for him to veto $1 billion.
There is a path the governor could take, however, that would get him to that goal. There is a provision in the budget bill (Sec. 4-1.02) that establishes a process for a governor to use when it becomes apparent that general fund appropriations will exceed the amount of general fund revenue projected to come in. In such a circumstance, the governor can develop a plan to “withhold allotments”. Although an agency may have an appropriation, it cannot spend that appropriation until it is alloted. Here is the exact language:
“In the event that the general fund resources are estimated by the Governor to be insufficient to pay in full all general fund appropriations authorized by the General Assembly, the governor shall[emphasis added], subject to the qualifications herein contained, withhold general fund spending authority, by withholding allotments of appropriations, to prevent any expenditure in excess of the estimated general fund resources available.”
This provision is intended to provide for an unexpected, sharp reductions in general fund revenue, such as the one that occurred about ten years ago. However, there is nothing that restricts its use to such circustances.
The governor could veto the tax increase. Aftter the start of the fiscal year, he could order a re-forecast, declare that the revenue projections fall significantly short of the total appropriations, and develop a plan to withhold spending authority by agencies. The process would be very messy and highly controversial. Democrats would accuse the governor of artificially creating the shortfall by vetoing the tax increase and they would be right. Such a move could backfire politically on Republicans. But it could be done.
-
sounds like it might be popcorn time!
“If it moves, salute it. If not, paint it.” I’m sure there’s a equivalent tax statute somewhere.
-
If it moves, tax it. If it doesn’t move, paint it, and then tax it…
-
If it moves, it’s PPTax. If it doesn’t, it’s RETax.
-
“If it moves, salute it. If not, paint it.” I’m sure there’s a equivalent tax statute somewhere.
“For the average taxpayer, these details will be gibberish. They will simply pay more tax on scores or hundreds of annual purchases, and in most cases will never notice the sales tax buried on the bill.”
Do they really think that we are so dumb as to not notice an increase in taxes. even if it’s not a spearate line item, we will know if the total price goes up like Cox always has a reason to ignore the contract and raise prices. only a buck or two, but the way I see it my digital/streaming bill will probably go up about $10, not a deal breaker but with rent going up, legislature passed an UNDERINSURED bill I am left with very little left over. and no, getting a job at 81 years old is not the answer.
I cut the tv cable 3 years ago but I still need the internet and where I live Cox is the only provider and I think what I’m paying is outrageous just for internet.
Which will he sign? Any bets? I’ve got “none” in the pool.
HB597-SB479: Allows localities to sue a landlord if they can’t maintain fit and habitable living conditions.
HB73: Expunges “unlawful detainer” actions after they are dismissed or a judgment is entered that favors the tenant.
HB442: Requires a landlord to allow the renter to start a payment plan if the rent owed is less than or equal to one month’s rent plus late fees.
HB598: Increases the late rent grace period of five to 14 days.
HB817: Adds numerous actions to the list of prohibited retaliatory actions by a landlord against a tenant. Makes it harder for landlords to enact reactionary punishments on the tenant.
HB993-SB422: Forbids rental agreements from containing fees for maintenance or repair or fees to submit rental payments unless the payment does not have a fee.
HB1251: Gets rid of requirement that a tenant must pay rent to escrow during their assertion against a landlord.
-
prolly any that cannot override a veto ?
A question on tax increases and/or the need or “want”, i.e. the debate between increasing taxes every session or not, holding the line, or even cutting taxes?
If no changes were made to taxes in Virginia, would there be a “natural” increase in revenues in a growing or expanding economy, sufficient to pay for raises for schools and state employees?
Could we actually CUT taxes and still have enough extra revenues to fund raises for teachers and state employees – at least SOME years?
Is the “surplus” a one-time thing or would continue year after year if it were not returned OR spent on new “investments”?
If Virginia increased the standard deduction , how much could they increase it and how much would it “cost” in state revenues?
Just a discussion, perhaps a debate. No name-calling or personal attacks or pejoratives ?
😉
Leave a Reply
You must be logged in to post a comment.