Proposed new Virginia ‘tech tax’ sparks backlash from business community

RICHMOND, Va. (AP) — Trade associations representing hundreds of companies that do business in Virginia have come out swinging against a proposal to expand the state sales tax to cover digital goods, something Republican Gov. Glenn Youngkin proposed and Democrats endorsed in their budget legislation.

Both chambers of the legislature included the new sales tax on purchases like streaming subscriptions, cloud storage and online downloads in the two-year budget plans they passed last week. The Senate went beyond the House of Delegates in also applying it to business-to-business transactions.

In a letter sent to lawmakers beginning Tuesday, the Northern Virginia Technology Council and other business-focused lobbying and trade organizations said the General Assembly should reject the proposed “tech tax,” which budget documents from both chambers show is estimated to generate over $1 billion in revenue over the next two-year state budget. At a minimum, the letter said, if policymakers move forward with the proposal, they should broadly exempt business-to-business transactions — or companies may be forced to pass along costs to consumers or move to other states.

“The proposed tech tax hike would put Virginia companies at a significant competitive disadvantage in industries where global competition is high and margins are narrow. The tax will very likely impact hiring and reduce internal research and development investment, the majority of which is currently concentrated here in Virginia,” Jennifer Taylor, president and CEO of the group, said in a statement included with the letter, which a representative of the organization shared with The Associated Press.

The Technology Council says on its website it has nearly 500 members, ranging from Fortune 100 companies to academic institutions and government contractors.

Additional interest groups, including the Virginia Chamber of Commerce, a data center coalition and a coalition of broadband providers, also signed onto the letter.

So did the Virginia Manufacturers Association, whose president and CEO, Brett Vassey, said the proposed tax would drive up the cost of software and online training materials used by factories.

Democrats have said the expansion of the tax is a commonsense adjustment that brings Virginia’s tax code in line with an increasingly digital world.

Currently, individuals would pay sales tax on a CD but not a digital download, and a company would pay taxes on a physical server but not cloud storage, Democratic Sen. L. Louise Lucas, chair of the Senate Finance & Appropriations Committee, said while unveiling her chamber’s budget proposal.

“I find it only fair that the same taxes apply to individuals and businesses when consuming the same services,” said Lucas, who dubbed the proposal a “new economy” tax.

Youngkin called for the expansion of the sales tax to cover what he calls the “Big Tech” loophole when he unveiled his proposed version of the 2024-2026 budget in December. But he also coupled it with an income tax cut, which Democrats voted down, in a budget package that would have reduced tax revenues overall.

“Governor Youngkin made it clear during his State of the Commonwealth address that he was only interested in a plan that reduced the tax burden for Virginians. While the governor will review any legislation that comes to his desk, his Unleashing Opportunity budget proposed a nearly $1 billion tax cut over the biennium, building upon the $5 billion in tax relief he delivered on a bipartisan basis to Virginians during his first two years in office,” spokesman Christian Martinez said in an emailed statement.

Later this week, lawmakers will send their competing budget plans to a conference committee, a group of legislators who will work to find a compromise plan to send to Youngkin. That process takes place out of public view and in recent years has not been finished on time.

Sarah Rankin, The Associated Press