ICYMI: SB 1460 will make a mess of online sales

As budget directors during multiple gubernatorial administrations, we know firsthand that phrases, words and definitions matter. When it comes to creating realistic budgets, reliable forecasts of income are key.

Nothing is more damaging than the unintended consequence.

A bill at the Legislature that seeks to define and create a sales tax classification of digital goods lurches down that dangerous territory.
Advocates of Senate Bill 1460 say the legislation simply provides “clarity,” but the fact is that it’s anything but clarifying.

The most likely effect of the bill is a widening revenue loss — the significance of which is unknown. The fiscal note from Joint Legislative Budget Committee for the legislation declined to provide an estimate, citing the lack of data on taxes collected from these sales.

How will it impact revenue? Don’t know

The Legislature is flying blind, considering changes to the tax law for which lawmakers have no concrete idea of the fiscal impact. The revenue loss is difficult to pinpoint, but rest assured, as more and more companies continue to digitize their products and services, the legislation would blow a hole on state and local revenues.

SB 1460 suffers from a lack of uniformity and clarity that could lead to the unintentional exemption of many other taxable items. It defines and creates a sales tax classification of “digital goods” that is composed of “prewritten computer software” and “specified digital goods.” At the same time, the classification excludes – and therefore exempts from taxation – “digital services.”

It is important to note that all three of these activities are subject to taxation under the current retail sales or rental of tangible personal property classification.

Cloud-based delivery, which delivers software, storage and security solutions for American businesses and households, is the fastest-growing element of the digital economy. Take Amazon Web Services, for example. It accounts for nearly 15 percent of Amazon’s revenue and more than half of the tech giant’s profits. This bill appears to codify that “cloud computing” would be outside the reach of state and local taxation in Arizona.

The traditional definition of “digital goods” includes streaming media and internet radio, but this legislation does not specifically mention streaming. This raises the question as to whether streaming is part of the “digital services” — and therefore not subject to tax. This lack of clarity is an open invitation to be sued by anyone wishing to avoid taxation.

SB 1460 is just inviting a lawsuit

The legislation’s vague definitions also plunge items like software downloads into a legislative no man’s land. The result is, the taxability of an item may be based solely on how the product is obtained.

Since the legislation’s definition of the exempt digital services includes “remotely accessed software,” “prewritten computer software” contained on a disc or thumb drive and purchased in a store is taxable while that same software bought and downloaded off the internet is exempt. The definitions are so vague that even software accessed through the internet (again, through cloud-based web delivery from an increasing number of cloud-computing companies) is tax exempt, because it is “remotely accessed.”

This legislation is a poorly crafted policy concept which will inevitably result in litigation, continued uncertainty about Arizona’s tax code and a substantial loss of revenue to public education, public safety and the myriad of other obligations the state and local governments must pay for.

Go back to the drawing board on SB 1460 — it is bad policy for Arizona.

Peter Burns served as state budget director and a senior adviser for three governors. Ted Ferris served as deputy chief of staff to Gov. Jane Hull and director of the Joint Legislative Budget Committee. Reach them at pjburnsaz@gmail.com and tf@tedferrisconsulting.com.