In a move emblematic of state sales tax trends, West Virginia has declared digital streaming services to be a taxable service — without changing any of its laws.
“Those states that don’t have it yet are extending sales tax to cover the digital equivalent of tangible personal property,” said Charles Maniace, vice president of regulatory analysis and design at global tax software provider Sovos.
The increased availability of streaming subscriptions has led many households to view traditional television bundles as bloated or overpriced. Nearly 60% of Americans have adopted some form of streaming service, and 20% have moved to streaming only. At the same time, many states and localities have been faced with tax revenue shortfalls. This has resulted in states beginning to look to the growing desire for digital media by taxing monthly subscriptions for streaming entertainment services.
West Virginia’s decision to tax streaming services is not a new law, not even a regulation, commented Maniace. “They simply said that streaming services are taxable under existing law. This underscores the need to pay attention — an extension of the existing law just suddenly happened. Unless you have processes that allow you to track regulatory changes, you might not have known that this happened.”
While digital products are specifically exempted under the law, there is no exemption for services, explained Maniace: “Therefore they must be taxed.”
West Virginia previously interpreted them as non-taxable, as spelled out in the Streamlined Sales Tax matrix. “West Virginia has agreed that the new approach won’t be applied retroactively, because the matrix did not provide any prior indication that streaming services were considered taxable.”
There is a further question as to whether West Virginia, as a member of [Streamlined Sales Tax], can tax streaming services under current law by targeting streaming services, and not taxing other subsets of digital products, according to Maniace. “It’s interesting that they selected streaming services as something to tax,” he said. “This is likely the result of the enormous growth in streaming services subsequent to the pandemic.”
Although other states are either already taxing streaming services or are considering doing so, there’s a difference in the way West Virginia went about it.
“Most states are unlike West Virginia in that they only tax enumerated services,” Maniace observed. “West Virginia taxes all services unless they are articulated as being exempt. So other states that have a ‘digital divide’ won’t be able to follow West Virginia in the same way.”
But it’s only a matter of time before those states where the digital divide still exists move to close the gap, Maniace suggested. “It’s a relatively noncontroversial way to generate additional revenue, because all they’re doing is extending the sales tax to the digital equivalent of things that are already taxed.”
“A good number of states have extended their law. It has become a multi-year journey to where states work to modernize sales tax law to reflect the digital economy,” he observed. “A lot of states ultimately got tired of trying to track how things are delivered because that can change. So they’re saying this type of product is taxed no matter how it’s delivered. For example, in Massachusetts, software is taxable however it is delivered. They don’t want to change the law every time technology changes.”
“What I see is an increased acceleration of disruptive changes in sales tax that happen with immediacy,” he said. “We’ll see other states impose new requirements much more quickly than they did before, with the expectation that sellers will be able to comply.”
