OKPOLICY.ORG
Taxes are a topic that will always generate a vigorous discussion. That’s what happened last week when the House Appropriations Finance Subcommittee took up an interim study requested by Rep. Mark Lepak, R-Claremore. Lepak, who won’t be in the Legislature next year due to term limits, has introduced multiple tax cut proposals during his 12-year tenure in the Legislature.
But this interim study request was to examine the potential taxation of software as a service, digital memberships, and subscription-based digital products and services. As software providers have increasingly shifted from one-time purchases of taxable products to recurring subscription models, states are facing questions about how these transactions should be treated for sales and use tax purposes.
Lepak’s request was to review the impact of these changes on state and local tax revenues, evaluate the taxation of digital streaming and membership services, and consider policy approaches adopted by other states, including South Dakota’s framework, to determine whether Oklahoma’s tax code should be modernized to address the evolving digital economy.
This differs from collecting sales tax on products sold online. Since 2018, when the U.S. Supreme Court overturned the physical-presence rule and allowed states to tax remote sellers, Oklahoma has collected taxes on those sales regardless of whether the seller has a physical presence in the state. This was a collection issue, not a new tax.
According to Dave Andren, director of research at the Oklahoma Municipal League, Oklahoma municipalities rely on sales and use taxes for an estimated 68 percent of their budgets. He said that as spending has shifted from tangible goods to digital services, untaxed digital purchases have caused revenue to lag behind economic growth.
Consumers who once bought boxed software, CDs, and movies — and paid sales tax on those products — now pay for access to digital services instead. Andren said more than 30 states have enacted taxes on subscription-based software such as Microsoft 365, Zoom, and Dropbox, as well as streaming and digital subscription services like Netflix and Spotify.
To keep pace with the increased costs of governmental services, it seems like rational public policy to move the tax base toward parts of the economy that are growing. But rationality usually doesn’t prevail when it comes to taxes. Finance Subcommittee Chairman Scott Fetgatter, R-Okmulgee, began the discussion by “throwing the 800-pound elephant in the room,” noting lawmakers’ and Oklahomans’ distaste for new taxes.
Committee members seemed to think the only way to move forward on taxing digital services would be to offset the tax by matching it with an equivalent decrease in the income tax. But after the passage of SQ 640 in 1992, such an income tax cut could be passed with a simple majority of the Legislature, while a new tax on digital services would require the approval of 75% of the Legislature or a vote of the people.
Rep. Gerrid Kendrix, R-Altus, said he thought such a pairing would be possible through voter education and outreach, but Fetgatter remained skeptical.
I’m reminded of the old saying, “everyone wants to go to heaven, but nobody wants to die.” By that I mean, everyone would like to find a way to help the cities and towns, but no one wants to take a political risk to do it. The tax “reforms” I see on the horizon seem to be coming from people whose motivation is to stifle growth in public revenue.
That would only keep Oklahoma at the bottom in public services like education, healthcare, mental health, and social services. I hope I’m wrong. Elections do have consequences.
