<div>thehalfsheet.org        <table><tr><td>May 19, 2020</td><td><div class="indented"><div class="indented">ABOUT</div></div></td></tr></table>  <table><tr><td>Virginia Could Gain Budget Resources</td><td><div class="indented">Institute for Fiscal</div></td><td> </td></tr><tr><td>by Eliminating Antiquated Sales Tax</td><td> </td><td> </td></tr><tr><td>Exemptions</td><td><div class="indented">The Commonwealth</div></td><td> </td></tr><tr><td> </td><td><div class="indented">Analysis provides</div></td><td> </td></tr><tr><td> </td><td> </td><td> </td></tr><tr><td>The latest monthly revenue report from Secretary of Finance Aubrey Layne</td><td><div class="indented">credible, independent</div></td><td> </td></tr><tr><td> </td><td><div class="indented">and accessible</div></td><td> </td></tr><tr><td>shows that state revenues are coming in more slowly as a result of the COVID-19</td><td>information and analyses of fiscal</td><td> </td></tr><tr><td>pandemic. Once the revenue situation becomes clearer, the governor is expected</td><td>and economic issues with particular</td><td> </td></tr><tr><td>to call a special session later this summer or fall for state lawmakers to take further</td><td>attention to the impacts on low- and</td><td> </td></tr><tr><td>action on Virginia’s next two-year budget, which begins on July 1. At that point, the</td><td>moderate-income persons.</td><td> </td></tr><tr><td>governor likely will have shared a revised revenue forecast. As policymakers begin</td><td> </td><td> </td></tr><tr><td>to make additional decisions around the state budget, the governor and General</td><td> </td><td> </td></tr><tr><td>Assembly should consider potential revenue options to help address some of these</td><td> </td><td> </td></tr><tr><td>challenges. In particular, among states that have sales taxes, Virginia is one of only</td><td> </td><td> </td></tr><tr><td>12 that does not apply a general sales tax to streaming platforms (as of July 2019)</td><td> </td><td> </td></tr><tr><td>and one of only 16 states that does not apply that tax to digital products generally (as</td><td> </td><td> </td></tr><tr><td>of Oct. 2019). By updating the tax code to include these products, the state would</td><td> </td><td> </td></tr><tr><td>put them on a level playing field with equivalent goods that have been traditionally</td><td> </td><td> </td></tr><tr><td>included in sales taxes and generate an estimated $40 million in needed state revenues</td><td> </td><td> </td></tr><tr><td>in the upcoming budget, as well as new local revenues, during this time of economic</td><td> </td><td> </td></tr><tr><td>turmoil.</td><td> </td><td> </td></tr><tr><td>Taking steps to modernize Virginia’s sales tax would help to shore up state and local</td><td> </td><td> </td></tr><tr><td>budgets while better aligning the state revenue system with 21st century reality. The</td><td> </td><td> </td></tr><tr><td>pandemic looks like it is accelerating the trend of economic activity shifting online.</td><td> </td><td> </td></tr><tr><td>However, despite recent modernizations, much of this new consumer spending is</td><td> </td><td> </td></tr><tr><td>exempt from Virginia’s state and local taxes. In particular, Virginia’s sales and use tax</td><td> </td><td> </td></tr><tr><td>and a related communications sales and use tax, which applies to phone, television,</td><td> </td><td> </td></tr><tr><td>and other services, do not extend to certain digital products and services, including</td><td> </td><td> </td></tr><tr><td>streaming.</td><td> </td><td> </td></tr><tr><td>These exemptions are not necessarily conscious policy choices and are likely</td><td> </td><td> </td></tr><tr><td>unintentional. Virginia’s retail sales and use tax was established in 1966 before the</td><td> </td><td> </td></tr><tr><td>digital economy existed. The more recently created communications sales and use tax</td><td> </td><td> </td></tr><tr><td>also has not been modified since 2007, which was the first year Netflix began offering</td><td> </td><td> </td></tr><tr><td>streaming content and before Spotify had launched. Instead, that law was written to</td><td> </td><td> </td></tr><tr><td>apply to the technology from that time period (and earlier), including satellite TV and</td><td> </td><td> </td></tr><tr><td>radio, fax services, pagers, and beepers. In 2015, the state Department of Taxation</td><td> </td><td> </td></tr><tr><td>published a report to examine the communications sales and use tax and found that</td><td> </td><td> </td></tr><tr><td>broadening the tax base by eliminating the exemptions for audio and video streaming</td><td> </td><td> </td></tr><tr><td>services and prepaid calling services would increase revenues and create a more level</td><td> </td><td> </td></tr><tr><td>playing field.</td><td> </td><td> </td></tr><tr><td>Many other states have taken action, and Virginia is among only 12 states that</td><td> </td><td> </td></tr><tr><td>have sales taxes and do not apply a general sales tax to streaming platforms (as</td><td> </td><td> </td></tr><tr><td>of July 2019). These services are subject to sales tax (or another tax) in the other</td><td> </td><td> </td></tr></table>  thehalfsheet.org        <table><tr><td>May 19, 2020</td><td>ABOUT</td><td> </td></tr><tr><td> </td><td> </td><td> </td></tr><tr><td>33 states that have sales taxes plus Washington, D.C., including all of Virginia’s</td><td> </td><td> </td></tr><tr><td>neighboring states. Meanwhile, 29 states plus Washington, D.C., generally tax other</td><td><div class="indented"><div class="indented">The Commonwealth</div></div></td><td> </td></tr><tr><td>digital products and services, including neighboring states North Carolina and</td><td> </td><td> </td></tr><tr><td> </td><td><div class="indented"><div class="indented">Institute for Fiscal</div></div></td><td> </td></tr><tr><td>Tennessee (as of October 2019). Florida is the only state that includes streaming</td><td> </td><td> </td></tr><tr><td> </td><td><div class="indented"><div class="indented">Analysis provides</div></div></td><td> </td></tr><tr><td>services but not other digital products in its sales tax base. Taxing these products</td><td> </td><td> </td></tr><tr><td> </td><td><div class="indented"><div class="indented">credible, independent</div></div></td><td> </td></tr><tr><td>and services puts them on a level playing field with equivalent goods that have been</td><td> </td><td> </td></tr><tr><td> </td><td><div class="indented"><div class="indented">and accessible</div></div></td><td> </td></tr><tr><td>traditionally included in sales tax bases (e.g., an e-book vs. a paperback book) as well</td><td> </td><td> </td></tr><tr><td> </td><td>information and analyses of fiscal</td><td> </td></tr><tr><td>as those recently added to the tax base (e.g., subscription-based streamed radio vs.</td><td> </td><td> </td></tr><tr><td> </td><td>and economic issues with particular</td><td> </td></tr><tr><td>subscription-based satellite radio).</td><td> </td><td> </td></tr><tr><td> </td><td>attention to the impacts on low- and</td><td> </td></tr><tr><td> </td><td> </td><td> </td></tr><tr><td> </td><td>moderate-income persons.</td><td> </td></tr></table>                                 During the 2018 General Assembly session, a bill that included provisions to apply Virginia’s sales tax to digital products was estimated to increase General Fund revenues in the 2021 and 2022 fiscal years by $19.6 million and $20.6 million, respectively, as well as additional non-General Fund revenues for K-12 education, transportation, and localities. A separate proposal from that year would have expanded the communications sales and use tax to cover audio and visual streaming services and prepaid calling. At the time, it was estimated to generate about $7.9 million annually in additional revenues for localities, though this may not account for the continued growth of these services in recent years. thehalfsheet.org        <table><tr><td>May 19, 2020</td><td>ABOUT</td><td> </td></tr><tr><td> </td><td> </td><td> </td></tr><tr><td>Fortunately, state lawmakers have worked in recent years to modernize Virginia’s</td><td> </td><td> </td></tr><tr><td>sales tax in other ways. Legislation passed during the 2019 legislative session updated</td><td><div class="indented">The Commonwealth</div></td><td> </td></tr><tr><td>Virginia’s sales and use tax requirements to include out-of-state online retailers.</td><td><div class="indented">Institute for Fiscal</div></td><td> </td></tr><tr><td>Previously, customers were required to send the state any tax they owed on their</td><td><div class="indented">Analysis provides</div></td><td> </td></tr><tr><td>untaxed online and catalog purchases, but few people did so. Under the law change,</td><td><div class="indented">credible, independent</div></td><td> </td></tr><tr><td>online retailers and marketplaces themselves are responsible for collecting any sales</td><td><div class="indented">and accessible</div></td><td> </td></tr><tr><td>and use tax owed — which is how traditional brick-and-mortar retail stores have long</td><td>information and analyses of fiscal</td><td> </td></tr><tr><td>operated.</td><td>and economic issues with particular</td><td> </td></tr><tr><td>The new law is providing needed resources for state and local priorities, including</td><td>attention to the impacts on low- and</td><td> </td></tr><tr><td> </td><td>moderate-income persons.</td><td> </td></tr><tr><td>K-12 public schools, transportation, and local services. Revenues generated from the</td><td> </td><td> </td></tr><tr><td> </td><td> </td><td> </td></tr><tr><td>new law had been coming in strongly compared to initial estimates and accounted for</td><td> </td><td> </td></tr><tr><td>the bulk of sales tax growth in the months leading up to the economic slowdown.</td><td> </td><td> </td></tr><tr><td>State policymakers should build upon these improvements and consider adopting</td><td> </td><td> </td></tr><tr><td>additional measures to modernize the sales tax base.</td><td> </td><td> </td></tr></table>  – Chris Wodicka, Policy Analyst Learn more about The Commonwealth Institute at www.thecommonwealthinstitute.org</div>

Virginia Group: Tax Digital Products to Offset COVID-19 Budget Shortfalls

Virginia Group: Tax Digital Products to Offset COVID-19 Budget Shortfalls

Commonwealth Institute

The Commonwealth Institute published a paper urging Virginia to modernize its sales and use tax code as a way of increasing revenue to combat COVID-19 <a href="/lr/resolve//2cjgd" target="_blank">budget shortfalls</a>; the state could collect an additional $40 million per year by taxing streaming platforms and other digital products.

Virginia Could Gain Budget Resources by Eliminating Antiquated Sales Tax Exemptions

The Commonwealth Institute published a paper urging Virginia to modernize its sales and use tax code as a way of increasing revenue to combat COVID-19 budget shortfalls; the state could collect an additional $40 million per year by taxing streaming platforms and other digital products.

The Commonwealth Institute published a paper urging Virginia to modernize its sales and use tax code as a way of increasing revenue to combat COVID-19 budget shortfalls; the state could collect an additional $40 million per year by taxing streaming platforms and other digital products.

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Chris Wodicka

The Commonwealth Institute

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Virginia Group: Tax Digital Products to Offset COVID-19 Budget Shortfalls