Cities raise alarm about plan to ban taxes on digital goods

March 6, 2018

PHOENIX (AP) — The association that represents Arizona’s cities and towns is raising the alarm about a proposal in the Legislature to ban sales tax on digital goods such as cloud computing software and digital streaming services.

The League of Arizona Cities and Towns says the proposal from Republican Rep. Michelle Ugenti-Rita would cost cities $48 million a year in tax collections and the state $120 million. Another $11.3 million would be lost from a fund for schools.

Ugenti-Rita said Monday the state has no authority to impose sales tax on software and other services accessed over the internet when there is no actual good delivered. She says the League and state Revenue Department could have sought that authority but instead just collected the taxes.

“This is a field that nobody should have been operating in to begin with, unless they did the right thing, which was to come down to the Legislature and pass policy reflective of what they want their tax environment to look like,” she said. “But no one’s done that — the department hasn’t done that, the League hasn’t done that. This could have been fixed a long time ago. This is a giant mess; we are ripe for legal action if we don’t fix this.”

League President Ken Strobeck said there is authority to collect the taxes and cities and the state will be sorely hurt by Ugenti-Rita’s legislation.

“If you go to Best Buy and buy a copy of TurboTax on disc you pay sales tax. If you download it from the internet and put it on your computer, you pay sales tax,” Strobeck said. “Under this bill, if you used it online, even if you were preparing your tax returns and still had a tangible product at the end, it would not be taxed. And so why wouldn’t everybody just gravitate toward that platform?”

Strobeck argues that there are lots of items not singled out in the tax code that are taxed — such as hammers, paint cans and brooms.

“But we have a category of retail products, that are tangible retail products that are taxable, and we believe that all three of these elements are tangible retail products,” he said.

The Legislation passed the House on a 39-19 vote last week and an identical bill is set for possible Senate floor action this week. That dual-track position ups the ante for opponents, because it shows votes could come so fast that opposition can’t be rallied in time.

Strobeck said the League, which represents 91 cities and towns, pulled data on 2017 tax collections from 11 large cities that maintained their own tax collection operations to come up with their tax loss numbers. They then extrapolated the numbers to show losses for all cities and towns and the state.

The result showed the average city would lose 1.75 percent of its sales tax revenues, a big hit when budgets are tight and cities face increasing pension costs.

The $120 million in state losses would also crimp the state budget, which is always short of cash to funds schools, highway construction and other priorities. In addition, a sales tax that funds public schools would lose $14.4 million.

“We’re trying to just make people aware of the fiscal impact, not only to cities and towns but also to the state,” Strobeck said.

Ugenti-Rita said good tax policy dictates the Legislature step in to clear up what she called confusion on what is taxed in Arizona.

“This is part of making sure businesses can operate competitively and fairly, transparently, so that there is consistency and they know what their tax obligation is,” she said.

— The legislation is House Bill 2479 and Senate Bill 1392

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