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Bill creates needed framework to tax digital goods and software

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Did anyone else notice their bill for cloud storage went up last year because a sales tax (TPT) suddenly appeared? As an association who follows state tax law closely, we wondered what law or rule changed. It turns out nothing changed. Bureaucrats at the state simply decided to start taxing the cloud.

We investigated how other states are taxing digital goods and services. Short version: Arizona is way behind. Arizona has no laws governing the taxation of digital goods and services and yet the state began telling some companies one at a time they were taxable. Without a legal framework, Arizona is exposed to a class-action lawsuit from any number of companies which could blow a massive hole in state coffers.

Sean McCarthy

Sean McCarthy

States around the country are debating which digital products should be taxable. To wit, Arizona is the only state with a similar taxing framework who is trying to tax cloud services without a single law change enabling the tax. We say “trying” because there is absolutely no uniformity among taxpayers. It’s a mess.

Knowing how difficult it would be to solve, we participated in a robust Study Committee to resolve this crisis. We spent countless hours listening to experts on how to properly apply TPT to digital products. The committee (including the cities) unanimously agreed the state must act to provide clarity.

HB2479 and SB1392 create a framework to apply TPT to software and certain digital goods. In the final stages, some cities and their representatives have cavalierly spread the false rumor that cloud services have been taxable for over 25 years and this bill is a tax cut.

Let that sink in. Cloud services have been taxable for 25 years, per the League of Cities. Two years ago the Legislature created a framework to tax home-based lodging like AirBnB because the lodging tax did not fit this unique situation. That’s how tax law is supposed to work.

But the narrative coming from the League is that all transactions conducted online are taxable unless specifically exempt. It’s an extraordinary assertion.

The arrogance reflected in the League’s position that every possible transaction is presumed taxable undermines taxpayer confidence in government’s ability to fairly execute their powerful authority to tax.

Arizona has long avoided charging TPT on services. You don’t pay state TPT on physical storage― why should you on cloud storage? The same goes for legal and financial services. Put them on the internet and they become taxable? Nonsense.

Only a few high tax states around the country have elected to tax the cloud. Arizona wants to be a leader in the digital economy, not one of the few trying to apply tax anytime money exchanges on the internet.

To protect our tax base and ensure fairness with main street sellers, the bill ensures that TPT is applied anytime a customer pays for a unique good. It makes taxable all licensed software and digital goods like music and media where the user can access content offline. This clarity protects businesses who collect this tax and will improve compliance going forward. It also protects the state from lawsuits.

Importantly, the bill makes clear all digital services such as website security, email hosting, and Software-as-a-Service are not taxable. It’s a fair resolution that has received bipartisan support.

So ask your mayors and city councilmembers why they are pushing to stop the Legislature from trying to clean up this mess. Why do they want to tax cloud services? And what’s their plan when the state gets sued for taxing without legal authority?

– Sean McCarthy is Senior Research Analyst with Arizona Tax Research Association

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The views expressed in guest commentaries are those of the author and are not the views of the Arizona Capitol Times.

2 comments

  1. Total nonsense, stop to start. These bills are tax giveaways — as much as a billion dollars a year, within the decade — and a sure path to disadvantaging Arizona companies and consomers vis-a-vis out of state interests. Just another sweetheart deal for the world’s largest and wealthiest corporations: Facebook, Google, Amazon, Netflix, AT&T, Verizon, Cox Cable, Comcast, IBM, Times Warner, and all their biggest commercial customers. Most states have NOT gone this route as McCarthy and the tax-dodgers he works for make out. Most tax DGS and have strict privacy and cost regulations in place also. California, which is merciless in taxing DGS sales (applying a conventional sales tax) doesn’t seem to be hurting in this sector.

    So far, ADOR has done a capable job plowing the weeds and the underbrush, getting to the nub of what DGS justly are and are not taxable in Arizona. If the legislative majority can’t imagine a better metodology for DGS taxation than none at all, it should stand down and let ADOR sort things out. The Governor in the name of prudence and the spirit of “don’t fix that which is not broken,” should veto this ill-informed and destructive legislation.

    PS The Democratic bills, held in committee, are much better and to the point. Where’s their Opinion champion?

    (I was chief consultant to the California Legislature for telecom and info policy during their formative years, participating in anchoring the nascent e-commerce industry in Silicon Valley. For that purpose, I coined the term “electronic commerce” in 1983 and assisted in passage of the “Electronic Commerce Act of 1984, ” establishing the first rules of the road for e-commerce. I suspect I know more about this field than McCarthy, who champions laissez faire, a sure path to Ruin. It wouldn’t take much.)

  2. This will lead to a recession. Many online retailers will go out of business and people will stop ordering. It does not cover used goods. When stuff is used sales tax was already paid. Here is a list of things to go up.

    Hosting

    Digital music and goods

    ebay all of it at risk. I could see tax of physical things. But digital goods are only a file sitting on a hard drive

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