One of the recurring revenue options that Gov. Mary Fallin laid out in her FY 2017 Executive Budget involved “modernizing the sales tax.” This was presented as something of a catch-all category described as “keeping the same low rates and applying them in ways that better reflect today’s commerce and consumer behaviors.” For the Governor, the biggest components of sales tax modernization are broadening the sales tax to include more services, which we discussed here, expanding collections on Internet sales, and eliminating sales tax exemptions. Another component of the Governor’s plan, which has received little attention, is “applying the sales tax to items delivered electronically.”
In today’s economy, a growing share of purchases involve digital downloads of goods that can also be purchased in stores — movies, music, books, software, etc. In all states with a sales tax, these items are taxed when they are purchased in physical form in stores. But in some states, including Oklahoma, these same items are not taxed when they are purchased and downloaded online. For example, if you purchase a CD at Walmart or Starship Records, you pay sales tax, but if you download the same music on iTunes, Oklahoma does not charge you sales tax. Similarly, if you buy software at Office Depot, you are charged sales tax, but if you download the same product from the Office Depot website, you are not.
Oklahoma is now one of only 12 states that exempts the sale of all major categories of digital goods — software, books, music, film and television, and games — from taxation, according to a 2012 study by the Center on Budget and Policy Priorities. Conversely, 34 states — or nearly three-quarters of those with a sales tax — tax downloads of software and games, and about half of the states with a sales tax also tax books, music, and films and television.
Admittedly, the revenue potential from taxing digital downloads is not enormous. The Center on Budget’s study suggests that Oklahoma could gain $5M to $7M annually from taxing major categories of digital goods and services (the estimates exclude software, for which there are no solid sales estimates, so the revenue potential is likely greater). But even if the revenue gains are modest, they are non-negligible and would help shore up a sales tax base that has been continually eroded by exemptions and the shift in consumer purchases to untaxed good and services. There is also a basic issue of fairness at stake. As the Center on Budget’s Michael Mazerov states, downloaded computer software, books and entertainment “are almost perfect substitutes for their tangible counterparts, and it is unfair to both the buyer and the seller of the latter products to only tax them.”
Expanding the sales tax to include downloaded items would be fairly simple: the Streamlined Sales Tax Agreement, which Oklahoma participates in, has detailed model language governing taxation of the five major types of digital goods (software, books, music, games, and movies and television). This aspect of sales tax modernization would make sense at any time, but it’s especially needed now, when every additional dollar the state collects means one dollar less in cuts to our schools, health care providers, and other critical services.