Idaho techies to state: Don't tax that phone app

zkyle@idahostatesman.comMarch 19, 2014 

That $6.99 game of Minecraft you downloaded for your iPhone? You owe Idaho 42 cents sales tax, the Idaho State Tax Commission says.

The state would lose that revenue if a bill before the Legislature passes, the Tax Commission says. The Idaho Technology Council disagrees. But the Senate Local Government and Taxation Committee on Wednesday recommended passage of the bill despite an unsettled debate about how much tax revenue it would cost the state.

Last year, the Legislature passed a law exempting cloud services from the state's 6 percent sales tax. Cloud services include software and products consumers download over the Internet. Cloud computing has quickly replaced traditional office- or home-based software, storage and servers for many uses.

Idaho charges sales taxes on most goods but not most services. The 2013 law, which was championed by Treasure Valley software businesses, was intended to clarify that cloud services are to be considered services — not goods, like the floppy disks of yesteryear or the CD-ROMs rapidly slipping into yesteryear.

Instead, the law created confusion. Take TurboTax. You can use it online without downloading it on your computer, and that's not taxable. But you also can download TurboTax software onto your computer. According to the Tax Commission, that's taxable. The bill before the Senate would exempt it from taxation.

Other downloadable products and services remained taxable, including songs from the iTunes Store, Amazon Kindle books, ringtones and movie rentals. They would still be taxed under the bill. But what about streamed Netflix movies or Hulu Plus TV shows? What about movies or music, like songs from Spotify Premium, that you can download for use offline? The tax commission says their tax status is uncertain both under the 2013 law and the proposed bill.

The Tax Commission says the 2013 law's vagueness forced it to make interpretations for the sake of tax audits.

The bill would cost the state at least $8 million a year in lost revenue, the Tax Commission estimates, though it's not sure. Proponents like Jay Larsen, president and CEO of the Idaho Technology Council, say it more likely would cost $2 million to $5 million, though they're not sure either.

Larsen said the Tax Commission incorrectly listed some music, video and games as possibly eligible for exemption even though the bill defines entertainment as taxable.

"Do not be deceived on this issue. It's much clearer than this," Larsen said. "We've clearly defined that entertainment is excluded, then they come up and tell you Netflix can be argued any way? In our method, it's supposed to be taxed."

Tax Commission representatives also said the tax-exempt status of some cloud services — such as digital subscriptions to publications — remains uncertain .Even if the new bill modernizes the old bill, the law will need updating in the coming years to keep up with the evolving technology, Larsen said.

"This is a modernization," he said. "What will happen with the growth of this industry will be phenomenal."

Sen. Elliot Werk, D-Boise, called the discrepancy in the fiscal-impact estimate "disturbing," but he voted for the bill. "I don't know which way to go on this, but I don't like the idea of money not being able to go to education," Werk said.

Sen. Jim Rice, R-Caldwell, said the added definitions provided by the bills represented progress even if the Tax Commission's doesn't have all the statistics it needs to calculate a comprehensive fiscal impact. I'm comfortable with what we've got," Rice said.

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