After suggesting digital sales tax, Youngkin blasts Democratic version

In December, Gov. Glenn Youngkin said Virginia should modernize its tax code by closing what he called “the Big Tech tax loophole.”

Virginia collects sales taxes when people buy a CD or a vinyl record, Youngkin’s administration explained while presenting his two-year budget proposal, but state policy hasn’t been updated to reflect the music industry’s shift to digital downloads and streaming services. Expanding the sales tax to cover all digital goods and services would bring the state an extra $714 million in revenue to the state’s general fund over the next two fiscal years, the administration said.

Youngkin budget calls for income tax cuts, sales tax increases

“Virginia has always taxed goods,” Youngkin said in his December speech to lawmakers. “And over the last decade the definition of goods has evolved into new economy goods, like software packages, digital downloads, streaming music and videos, cloud storage and other electronic media.”

The governor proposed applying the sales tax to the digital realm and raising the sales tax rate as part of a broader package of policy changes that included a 12% reduction in the state’s personal income tax rate and a bigger earned-income tax credit that would benefit lower-income workers. The sales tax increases, Youngkin said, would help offset the income tax cuts while still translating to an overall reduction to Virginans’ tax bills.

Now, in multiple campaign-style appearances at local restaurants, Youngkin is pointedly attacking Democrats for taking his idea and running with it in a direction he didn’t intend. 

“They want to put their hand in your pocket and take your money that you deserve to keep,” Youngkin said last week at Eggs Up Grill in the Richmond-area suburb of Chesterfield County.

The Democratic-crafted budget that passed the General Assembly this month with some GOP support included the new digital tax, but not the tax cuts.

The governor went on to tell the Chesterfield crowd Democrats want to tax Virginians “as much as you can take, before you move away.”

The General Assembly wrapped up the 2024 legislative session and left Richmond on March 9, but the tax battle is one of the major unresolved issues Youngkin and state lawmakers still need to figure out. Some of that work will happen over the next few weeks, before legislators return on April 17 to take up Youngkin’s amendments to the budget and his actions on more than 1,000 bills.

Youngkin has vowed to remove all tax increases from the General Assembly’s approved budget, a move that could also involve undoing some of Democrats’ increased spending on K-12 schools and raises for teachers and state employees. The governor has said he’s hoping to avoid having to veto the entire budget, which allocates $65 billion in general fund spending over two years. But budget talks this week have produced few signs of progress toward a deal, according to the Washington Post.

While explaining the digital sales tax provision that’s become a major sticking point, Democrats echoed Youngkin’s own rationale for it.

“Why should someone buying a CD, DVD or book pay sales tax while that purchase goes untaxed if it is streamed or digitally downloaded?” Senate Finance and Appropriations Chairwoman Louise Lucas, D-Portsmouth, asked earlier this month while presenting the legislature’s budget deal on the Senate floor. Unlike Youngkin’s proposal, Lucas added, the General Assembly’s budget doesn’t increase the sales tax rate, it only applies it more broadly.

After dropping in on the governor’s Chesterfield event last week, Del. Mike Jones, D-Richmond, disputed Youngkin’s portrayal of the budget as a reflection of Democrats’ tax-and-spend impulses. In the House, he said, roughly a dozen Republicans voted for the plan.

“We think we’ve put together a reasonable budget that’s going to impact Virginians on the things that are important to them,” Jones said.

The Youngkin administration wanted the digital sales tax to only apply to consumer purchases, but the version approved by the legislature also applies to business-to-business software transactions. In a recent letter, the Virginia Chamber of Commerce urged the state’s business community to oppose the tax, saying it could cost them up to $360 million per year.

“The high cost of doing business in the Commonwealth is already a recurring theme in reviews of Virginia’s business climate, and these tax provisions will further raise that cost across all industries,” Virginia Chamber President and CEO Barry Duval said in the March 15 letter.

Seeming to anticipate business opposition in her Senate speech, Lucas said the approved budget narrowed the digital tax to apply only to business software purchases instead of the broader categories applied to consumers like web hosting, data storage and streaming.

“Software used by a business represents the end user just like an individual using Microsoft 365,” Lucas said, referring to Microsoft’s popular productivity software like Word, Excel and Powerpoint. “Businesses should help support the costs to cover programs that benefit them and their employees, like child care, education and transportation.”

The Virginia Education Association, which advocates for more public school funding and better pay for teachers, praised the General Assembly’s budget as prioritizing education.

After 2024 legislative session’s end, legislature releases two-year state budget

“By prioritizing the modernization of our revenue code, rather than tax giveaways to the wealthy, as the governor proposed, leaders were able to make the type of investments that will improve services and support for students in every classroom throughout the commonwealth,” VEA President James Fedderman said in a March 11 news release. “We now look to the governor to sign this pro-education budget and choose kids over corporations and his wealthy friends.”

In its budget presentation late last year, the Youngkin administration specified it wasn’t attempting to impose new digital taxes on business transactions.

At the time, Youngkin Finance Secretary Stephen Cummings explained the proposal as similar to how the state responded to the rise of Amazon, which unlike brick-and-mortar stores initially wasn’t required to collect and submit sales taxes for purchases made in Virginia. Under pressure from traditional retailers concerned about fairness, the state changed that policy in 2013 and Amazon began collecting sales taxes in Virginia.

“We think it is a fair and appropriate way to treat these types of services,” Cummings said of the new digital tax proposal.

While bashing what he’s dubbed the “backward budget,” Youngkin has said the General Assembly’s spending plan includes $2.6 billion in tax increases. 

The digital sales tax provision would bring in about $1 billion over two years to the general fund, the state’s main pot of money to spend on discretionary initiatives. Youngkin aides have argued its true impact is closer to $2 billion if you add in non-general fund money dedicated to transportation and schools. The $714 million figure the administration presented in December only accounted for general fund revenues.

Youngkin has also blasted Democrats for insisting on budget language that would require Virginia to reenter the Regional Greenhouse Gas Initiative, a multi-state initiative to reduce carbon dioxide emissions by electricity producers. The program requires power companies to purchase carbon allowances, incentivizing them to emit less. Funds raised from those purchases are then used to fund flood resilience and energy efficiency programs.

Reentering RGGI, Youngkin told the crowd in Chesterfield, means Dominion Energy and Appalachian Power will “just charge you for their costs,” which he estimated at $600 million to $800 million.

“They pass it through,” Youngkin said. “You have no choice. You have nothing to say about it.”

After pushing through $5 billion in tax relief in the first half of his term, Youngkin said he won’t support a budget that goes in the other direction.

“We just can’t let this happen,” Youngkin said. “And so, we’re not.”