Tax Policy for the Internet Age

Tax downloads? What is he talking about?

Let me explain. Today if you buy a copy of “Gladiator” at Barnes and Noble you pay sales tax on it. If you rent it from Blockbuster you pay sales tax. Rent from Netflix? Pay the tax. Download it from Amazon? Pay the tax. However, if you watch the same movie as a stream that doesn’t stay on your hard drive you don’t. Why?

The same thing happens with games. Buy a game at a local store and pay the tax. Download the game from Amazon and pay the tax. Many new games have a significant on-line component. My son is a very serious pirate in “Eve Online,” a massively multiplayer online game. He pays $15 a month for this game experience which isn’t taxed, but a similar game he would download would be.

More concerning is the amount of data a corporation buys today that is a key element of how they run their business. The department of revenue and the business community disagree somewhat on how this will be taxed. This generates uncertainty and lawsuits.

This is crazy. There needs to a simple way to figure out what’s taxable and what’s not, and however we do it we shouldn’t have some business models create a loophole that other ways of buying the product don’t have. We all want to avoid paying taxes, but I would think we could agree that people buying the same product should pay the same tax, regardless of the form they acquire it.

The last time the section of law in Washington that defines sales tax for software was substantively overhauled is about 30 years ago, long before Al Gore thought up the Internet. The world has changed significantly since then. Currently we pretend that downloadable music is a “tangible personal product” in the tax law, something that is becoming more intellectually difficult to defend.

I’ve been working with the business community, including major game manufacturers, to try to simplify the tax treatment of “digital products” as they become more important in the future. A task force met for 18 months to try to resolve the issue and create a bill we could all agree on. We have that agreement today. The key goals we all agreed on were:

  • Revenue-neutral. The bill is not an attempt to raise money – it’s a balancing act to have a better-working tax system.
  • Technology-neutral. A product should either be taxable or not, and the tax treatment shouldn’t depend on the specific business model in which it’s distributed.
  • Protect Washington businesses. Whatever we do should not disadvantage Washington businesses, particularly our high-tech industry which generates many jobs.
  • Durable. The bill should be able deal with changes in technology over the next 20 years without big re-writes every few years.

House Bill 2075 mostly moves things around in the tax code – for example moving books, music and videos from the “tangible personal product” category to the “digital goods” category. The bill is designed to create a durable platform for taxation in the future. It creates as many things that are not taxed as things that are, and the current fiscal note shows that for the next ten years the bill actually reduces taxes slightly. It is not an attempt to raise new revenue.

Washington is a sales-tax state. We don’t have an income tax, and aren’t likely to have one any time soon. A successful sales tax program taxes products broadly so that the rate can stay as low as possible. This keeps the tax from affecting decisions consumers and businesses make. It’s not fair if a game that has a disk costs less than a game that’s accessed on-line, only because of the business model. Trying to keep this platform technology-neutral helps keep rates low statewide.

HB 2075 creates a sales tax platform for the 21st century, or at least for the next 20 years until the world changes again.

Author: Ross

I am the Director of the Department of Early Learning for Washington State. I formerly represented the 48th Legislative District in the State House of Representatives, chairing the Appropriations committee and spent many a year at Microsoft.