Brace yourself for some digital taxation, Pennsylvania.
The latest budget for the Keystone state closes a tax loophole for digital downloads. As of today, products such as apps, books, music, and streaming services will now be subject to the same six percent state tax as all physical goods sold within the state.
With the move, Pennsylvania joins roughly half of the states in the nation to impose such a tax, a move Michael Mazerov says is a long overdue and a "no brainer."
I recently spoke to Mazerov, who is a Senior Fellow at the Center on Budget and Policy Priorities' State Fiscal Project. Mazerov joined the Center staff in January 1998, and his work focuses on state and local taxation of business under corporate income and sales taxes, including taxation of Internet commerce. He told me that these products were exempted simply due to a combination of legislative language and unforeseen technological advancement.
"It's a historical accident," he explained, when I asked him what took Pennsylvania and other states so long to start taxing these downloads. "Most sales tax laws were written in the 1930s when services were not a major component of how people spend money. Items that were taxable under most sales tax laws were defined as 'tangible personal property' and other things were only taxable if they were specifically named. The fact that these digital goods are not tangible property means states have to go out of their way to take action in order to make them taxable."
It only makes sense that states got around to doing so. Digital downloads are replacing tangible products practically everywhere we look, from e-books to movies to music tracks. The transition to digital is so pronounced that Pennsylvania estimates taxes for these downloads will bring in nearly $46.9 million in the coming year. But the new legislation doesn't necessarily mean sellers will be forced to comply.
"There are two separate issues: whether state law defines the product as taxable, and - the issue that gets a lot of the attention - whether the state has the authority to force the online seller to charge the sales tax on the product. This issue arises on the issue of digital downloads. Can you require the seller of the digital good to charge the tax?"
Still, for the most part, Mazerov told me that sellers, such as Apple or Barnes and Noble, don't have a problem with it. They've been charging sales tax in their online stores for years, thanks in large part to their large brick-and-mortar presence in most states. In fact, industry opposition to this tax is practically non-existent.
"The industry hasn't really been actively opposing state efforts to extend the sales tax to digital goods," he said. "For sellers, it's money they're just collecting from consumers and handing it to the states. Where the opposition is coming from is more from conservative legislators who oppose any change in tax law that raises tax to collect more revenue."
So with few hurdles to overcome and the amount of revenue to be gained so high, does Mazerov expect the rest of the states holding out on amending their tax code to close similar loopholes, especially when consumers barely even notice?
"I hope eventually, but not pretty quickly," he surmised. "I wrote a report on this almost four years ago now (December 2012) making the case that there were lots of level playing field kinds of arguments for extending the tax to these types of products, and in the ensuing four years, Pennsylvania is only the second state to do so. I would like to think this is something that will happen quickly, but in the real world, things happens much more slowly."
Apparently, even the most painless taxes have slow adoption rates, no matter how inevitable they seem.