US digital tax developments: revenue streams squeezed

Tue Nov 3, 2015

There have been some interesting US digital tax developments of late, with the common driving force being the amount of potential revenue going unclaimed by tax jurisdictions.

US digital tax

In late October 2015 Chicago officially rubber-stamped their new amusement tax (commonly referred to as a ‘Netflix Tax’ and in operation since July 1, 2015), while both the city of New York and the State of Georgia have received budgetary advice on the need to tax digital services.

Today’s taxation systems are not suitable for taxing digital services in the rapidly evolving digital economy, especially those that are supplied from outside of a specific State or City.

Potential US digital tax revenues

The general advice from independent budgetary offices is to tax digital services due to the amount of revenue that is uncollected as digital services go untaxed.

Chicago’s new cloud tax on internet-based services like Netflix – officially approved by Chicago City Council in late October as part of an overall taxation package on a 36-14 vote – is expected to raise more than $40 million per annum. New York City has been told it could raise up to $21m with New York State in line to recoup $38m.

Meanwhile, the State of Georgia has been informed that it is forgoing between $47m and $57m every year by not taxing digital services. That’s not all: local governments in Georgia are predicted to lose between $35 million to $43 million if the taxation status quo remains.

Chicago’s different approach

Since June 9, 2015, Chicago has flagged the introduction of such a tax, but doing so via an existing amusement tax differs somewhat from the approach of other U.S. States that enacted specific tax laws on digital services such as cloud computing, digital downloads of music, films, and images, and streaming services in the form of Spotify and Netflix.

Other States that do tax digital services do so via sales or use tax mechanisms. These States adhere to the Streamlined Sales and Use Tax Agreement (SSUTA). Currently, 24 States have adopted the simplification measures in the SSUTA and more are in the planning phases of adopting this taxation simplification measure.

The purpose of the SSUTA is to “simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance. The Agreement focuses on improving sales and use tax administration systems for all sellers and for all types of commerce.”

This, of course, includes eCommerce but eCommerce is evolving rapidly and States are trying to recalibrate their mature taxation systems to suit the digital economy. The move by the city of Chicago is afirst step in this direction.

New York advised to tax digital now

The budgetary recommendation from New York’s Independent Budget Office (IBO) is more ground-breaking as the State of New York does not have a set definition of digital goods for sales tax purposes. New York is also not a member of the SSUTA.

The IBO’s September 2015 fiscal brief contained this advice for New York City and State legislators:

  • If the market continues its shift towards digital and away from physical formats, $41 million of current New York City tax revenue from the sale of physical media goods is at stake.

  • Extending the sales tax base to include downloaded and streamed music, videos, and e-books would yield $21 million in additional annual revenue for New York City. This figure will grow over time as sales of digital goods continue to increase.

  • In New York State, sales tax revenue from physical media goods currently totals about $76 million a year and extending the tax to cover their digital equivalents would yield $38 million annually.

The final paragraph of the IBO’s September 2015 brief succinctly encapsulates the dilemma facing not only New York City and State but tax jurisdictions worldwide:

“Failure to recognize changes in the media goods market with a corresponding change in the sales tax base will result in continued erosion of sales tax collections going forward, as new products provided over the Internet will continue to go untaxed. While these figures seem small compared with current sales tax collections, the taxation of digital goods will become a more pressing issue over time as more newly developed goods and services—such as cloud computing—will be intangible and therefore not automatically included in the sales tax base.”

The Georgia Budget and Policy Institute report released in late October 2015 echoed the sentiments expressed by New York’s IBO:

“Georgia is forgoing an estimated $47 million to $57 million in state revenue in the 2016 budget year by not taxing digital goods. Local governments in Georgia will lose $35 million to $43 million. These losses are forecast to grow considerably in the future as consumers shift more toward online purchases. The long-term growth of the digital industry is a key reason States need to modernize sales tax systems soon, so revenue systems keep pace with rapidly changing economic realities.”

Note: Taxamo content is created for guidance only, please consult your local tax advisor for professional advice.

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