S.B. 162 Online Sales Tax Amendments: transcript

So, uh, I'm just gonna try and read through this pretty quickly. The, the bottom line is the tax commission is, this bill is not going to change anything in the present code. It's just an update with clarifying information. I know some of the budget people were licking their chops when they saw this in ongoing increases, but it, it, the, the physical note is, is not accurate. 'cause it, this is gonna be the exact same process that has been, uh, that they have been doing in the, in the tax commission. So, uh, SB 1 62 addresses an area of confusion in Utah's sales tax statutes with regard to streamed and don't downloaded products. Some of us remember the days when we would go to Blockbuster, pick up a movie, watch it and return it blockbuster. The rental of a movie was subject to sales tax, then technology changed. And instead of going to Blockbuster, we would, we would go to Red Box, pick out a movie, and kiosk would dispense a DVD, which we watched, and then return the red box machine again, the rental of the movie was subject to sales tax. Well, we all know that technology has changed a lot since the days of Blockbuster and Redbox, and we want to watch a movie at home. Today. Many internet based platforms offer streaming services. Some of those services also offer the option to download a media product. However, as technology has changed, questions have been raised regarding whether getting a movie through streaming should be taxed any differently than getting a movie from Red Box or Blockbuster was taxed. Uh, products transferred electronically have long been part of Utah's sales tax base and are therefore already subject to sales and use taxes. However, older case law distinguished between downloadable and streamed products, the thought behind this distinction was that with a stream product, the whole product is not transferred, but rather only a buffered portion of the product is transferred. While this distinction made more sense in the days of Redbox and slower speed internet, the distinction is less relevant in landscape of modern technology and high speed internet. Whether a product is streamed or downloaded, it can be played or watched. Similarly, the tax commission is finding that this longstanding distinction between stream and downloadable products is causing confusion for taxpayers, sellers, and in administration. The tax commission is finding that most sellers are already collecting or remitting sales and use taxes on both stream and downloaded products. But a small, small number were not. SB 1 62 eliminates this confusion by clarifying the digital audio works. Digital audio Visual Works, digital books and gaming services are subject to sales and use taxes. Regardless whether they're streamed or downloaded. This bill creates a level playing field between streamed and downloaded products and for the businesses that sell them. It also promotes compliance by eliminating a known area of confusion in the sales tax code. Uh, and I believe, um, I I think that'll conclude my presentation. I think there might, we may, we may have some comments during public comment. I wish they said, oh, wait, do you want to come up? Just quickly come on up. Jason, do you want to, or just come up here if you make a, a quick statement, we're on the clock.

Absolutely. Jason Gardner, deputy Executive Director of Tax Commission. Uh, we appreciate Senator Wilson running this bill. This is, has been an area of confusion, substantial confusion for a long time. Uh, and, and kind of a, a somewhat nonsensical distinction into considering today's modern technology. I think this is gonna make it, this cleans up the code, makes it clear, and, and I think to the extent that it generates revenue, will generate revenue because of the fact that people know what they're obligated to pay sales tax on. Okay. I think that concludes our presentation, Mr. Chair.

Do you want to go ahead and address that or do you want me to, that was the bottom line of talking to Commissioner Valentine. He came and talked to me about this, this physical note's wrong. They, the physical note, uh, the person that did the physical note was assuming that we were gonna collect more than we already are, which we're not. So this physical note is not accurate.

Mm-hmm. Um, it's not unusual to get a fiscal note, you know, wrong or whatever, like that can happen. So I fiscal Note, believe this is the tax commission that does the fiscal note. So we provide input to the legislative fiscal analysts, uh, and then they, they have the responsibility of making the fiscal note. I mean, I think, I think the concept here with this fiscal note is that previously there was this distinction that if you have the option to download a product, that that would be what triggers the sales taxability of that product. So if the only way to to view that product was by streaming alone and there was no option to download, regardless of whether you actually use that option or not, that is the nexus between the fiscal current practice, the fiscal note. And, and what this will, this will clarify and make it streaming, is streaming regardless of whether the option to download exists. Okay. So that may be the nexus that they're, they're fixing in on with the fiscal note.

No. And I, I, I made it, I made it known that this was not accurate, but, and there were some frowns, uh, with the budget chairs. Yeah. So if you'll, uh, if you'll get that updated, that helped me a lot. But for my purposes I'm fine.

I'm a state and local tax attorney at Holland and Hart. I practice with a lot of taxpayers in this area. I'm here today just as a tax practitioner on behalf of myself because I see what's going on in this area. And there is a lot of ambiguity, uncertainty. It has not been clear or uniform for taxpayers. And this is a good bill to make it much more clear and uniform for taxpayers. And I would concur with the comments that for the most part, the industry is collecting and remitting in this area. And so the fiscal note is a, a mystery to me as well.

Uh, sure. A motion that we favor recommend SB 1 62 to the full body of the Senate.

Thank you, Mr. Chair. Appreciate that. Um, SB 1 62 first sub address is an area of confusion of Utah State, uh, sales tax statutes with regard to stream and downloaded products. Some of us remember the days when we would go to Blockbuster, pick up a movie, watch it, and return it to Blockbuster. The rental of a movie was subject to sales tax, then technology changed. And instead of going to Blockbuster, we would go to Red Box, pick out a movie, and the kiosk would dispense a DVD player, which we watched, and then return to Red Box machine. Again, the rental of the movie was subject to sales tax, but we all know that technology has changed a lot since the days of Blockbuster Red Box. If we want to watch a movie at home today, many internet-based platforms offer streaming services. Some of those services also offer the option to download a media product. However, as technology has changed, questions have been raised regarding whether getting a movie through streaming would be taxed any differently than getting a movie from Red Box or Blockbuster. Uh, of course, they were taxed, uh, products transferred electronically have long been part of Utah's sales tax base. That's how the, how it's always been and are therefore already subject to sales and use taxes. However, older case law distinguished between downloadable and stream products, the thought behind this distinction was that with the Stream product, the whole product is not transferred, but rather only a buffered portion of the product is transferred. While this distinction made sense in the days of Redbox and slower speed internet, this distinction is less relevant in this, in the landscape of modern technology and high speed internet. Whether a product is streamed or downloaded or it can be played or watched similarly, that brings us to this bill. The state, the, the tax commission came to me and they, uh, there's always, there's been a longstanding distinction between streamed and downloadable products. And, and some of that's been causing confusion for taxpayer sellers and administration. Uh, the tax commission is finding that most sellers are already collecting and rebidding sales and use tax on both streamed and downloadable products. There's been a small number that are not, I don't know how much I can say. Um, the bottom line is what this, this does not change any policy. All this does is clarifies what the current law already is. Um, there, there were a couple of large providers who, um, decided they didn't have to collect sales tax. Um, and so a compromise was worked out with these large providers. They helped with this language to clarify, and they have agreed that they will, again, collect sales tax as they should have in, in our opinion, they created a loophole. This will close the loophole. Um, they have been a part of this, uh, of this coming up, this language. And basically this bill will eliminate the confu, the confusion by clarifying that digital audio works, digital audio, digital works. Digital books and gaming services are subject to sales and use taxes regardless of whether they're streamed or downloadable. This bill creates a level playing field between streamed and download products and for the businesses that sell them. It also promotes compliance by eliminating a known area of confusion, the sales in the, uh, sales tax code, uh, Mr. Uh, uh, chair, um, I've got Jason Gardner with me, with the, with the tax commission. If, if he could have a statement or if he needs to answer any questions or anything. The bottom line is like, this is not changing what the law is. It's clarifying, closing the loophole going forward. And this language was worked out between one of the very large companies and the, and the tax commission, uh, to, just to clarify things going forward.

It does, unless you have anything to say. Absolutely.

Sounds good. Jason Gardner, deputy Executive Director of the Tax Commission, uh, to echo Senator Wilson's, uh, words, uh, the words products transferred electronically have been our sales tax tax code for decades. This is not, not new. The question is what is considered a product transfer electronically? And that's where all the confusion has come from, is, is, you know, the bits and bytes you're transferring while you're streaming any different than a downloaded product as far as a product transferred electronically. And that's where this ambiguity has come from. The, some of the case law that's out there has kind of added that ambiguity. This bill is a good bill. It clarifies that we think it's good. It'll, it'll make it easier for taxpayers to comply and, and quite frankly, for the state to administer. And it, and it, it treats what's transferred electronically. The same as if you, you got a movie from Redbox as, as Sarah Wilson was saying, or you got a book, you bought a book. Anything that you would normally get physically it treats it the same if you get it digitally.

Thank you. Uh, so our, um, right now is streaming text or supposed to be text. Yes. And, and then when we buy something online, it's supposed to be text like a, we download a, a video from Prime.

Yes, that is, that is, that was, yes. Current code. Yes. Current

Code. Okay. Um, I'm curious about why they, if, if it's current code, why, what was the loophole they were, they were using?

Uh, So I can, Yeah, I'll let Jason Yeah, I, I got, I've gotta be somewhat careful. There's, there's some things going on that we have to be careful What we say. So without going into the details of the loophole, the, the distinction is that the case law has made a distinction between if you have the option to download, not whether you actually download, but whether you have the option to download in conjunction with streaming. If you do not have the option to download, meaning it's streaming only, and the provider doesn't provide the option to download that product for offline use, which most providers do, just to be clear, uh, that was not technically subject to the tax because of the case law distinction that was made between download and streamed. You'll notice the current law doesn't use the word download or streamed anywhere in the law. So that distinction is purely created, uh, judicially.

Alright. Got it. Thank you. Yeah.

Thank you. Steve Young, uh, state and local tax attorney at Holland and Hart. I'm here today on behalf of myself as a tax practitioner that works heavily in this area. I have been involved in a lot of these, the legal advice and, and cases that have been out there and just want to voice my support for this bill while it has a fiscal note on it. And it appears to be a tax increase of sorts. I don't perceive it that way in my experience. Most everyone is collecting and remitting on these types of services out there. And this bill will go a long way toward creating predictability and uniformity for the industry. 'cause right now there's ambiguity and it's gotten confusing and we really would just like to have a level even playing field for everyone out there.

I remember that. Well, it happens to me often. Yeah. It was kind of embarrassing. So I hope

There, there's none. Yeah. Correct. Okay. All right.

Thank you, Mr. Chair. Uh, I move that we pass out favorably SB 1 62, uh, first sub with a favorable recommendation.

Uh, yeah. I like, I like the fact that it's just making it consistent throughout so that everybody's on the same page of music.

Yeah. I just appreciate the, you know, Steve Young being here and explaining, you know, why, why this is needed. And, and like I said, we all came together and to clarify the language, it's gonna be good going forward. So I appreciate the support.

It was, it was, aye.

Senator Wilson. Thank you Mr. President. Uh, there's a first sub also I'd like to move Mr. President,

Uh, first sub Mr. President, I'll let a motion that we move first sub.

Yes. The sub addresses a concern raised by cable television providers who are already subject to the multi-channel video or audio service tax act. It just clarifies that if a transaction is subject to the multi-channel video or audio service tax, it is not also subject to the sales tax on streaming. That's just a clarification of the exemption, Mr. President. It's not a change in policy.

Thank you Mr. President. Uh, this bill was brought to me from the tax commission. It addresses an area of confusion in Utah's sales tax statutes with regard to streamed and downloaded products. Some of us remember the days when we would go to Blockbuster and pick out a movie to watch that rental of the movie was subject to sales tax. Then technology changed and we would go to Redbox pick out a movie from the kiosk. Again, the rental of the movie was subject to sales tax, although Block, block, blockbuster and Redbox did not seem that long ago. Technology has changed a lot since then. Now, if you wanna watch a movie, any platforms offer the ability to stream that movie over the internet. However, as technology has changed, questions have been raised regarding whether getting a movie through streaming should be taxed any differently than getting a movie from Red Box or Blockbuster Products transferred electronically have long been part of Utah's sales tax base and are therefore already subject to sales and use taxes. However, older case law distinguished between whether the product, uh, was downloaded or just streamed. The thought behind this distinction was that what the stream product, the whole product was not transferred, but rather only a buffered portion of the project is transferred. While this distinction may have made more sense in the days of slower speed internet, the distinction is less relevant today with the high speed internet, whether a product is streamed or downloaded, it can be played or watched similarly and should be taxed. Similarly, the task commission is finding that this longstanding distinction between streamed and downloadable products is causing confusion for taxpayers, sellers and administration. The tax commission has found that most sellers are already collecting sales and use taxes on both streamed and downloadable products, but they're still a small number of streaming platforms that are not SB 1 62. First substitute eliminates this confusion by clarifying that digital video, audio, books and gaming are subject to sales and use taxes regardless of whether they're streamed or downloaded. This bill creates a level playing field between streamed and downloaded products and for the businesses that sell them. It also promotes compliance by eliminating a known area of confusion in the sales tax code. Uh, the physical note, there's a small number of streaming platforms are not currently collecting tax. These platforms may be structuring their transactions to take advantage of the difference in taxation, be streamed between streamed and don downloaded products in order to avoid taxation or because of general confusion about the taxability of these transactions. By eliminating the difference in taxation between streamed and downloaded products, this bill will ensure clarity in the law and a level playing field for all platforms. With that Mr. President, that'll conclude my presentation.

Uh, discussion, Senator Winterton for yield.

Senator Wilson will yield Yes.

Uh, question that comes to mind. We collect this as a state sales tax. Uh, or does it go back to say my zip code? I'm, I'm just wondering if, if people are buying more and more online, not going to the bookstores and that, how do our locals, you know, how do we make that up to them? Is that tracked that way? Can you answer that, Senator Wilson? Yeah, that, that's a great question. Um, I, I assume in my conversations with the tax commission that goes into the state tax, but I I will have to, I'll have to ask about that, but, uh, my, my, my indication would be is it's the, the state sales tax collection.

Okay. I, I'd encourage you to look into that because if we're encouraging or people buy online, we're discouraging them from supporting local. Unless we're getting credit for the dollars spent and the tax coming to the state, there should be some compensation for the loss of revenue locally. And Mr. Mr. President, Senator Vickers, if I can, uh, yeah.

And, and this is not gonna change whatever the process now It is, it won't change what it is, but I, I will find out for you and let you know. That's a good question.

Okay. Thank you. Senator Kwan,

Mr. President, um, the sponsors yielded, so I will ask a question if that's okay. Um, first of all, um, it, I'm wondering if the, uh, movie or whatever is downloaded is downloaded out of state. Does that matter? Senator Wilson?

I, I guess I'd need to downloaded out of state or, Or watched or, you know, ordered out of state. So not in Utah. Does that Senator Wilson make a Difference? Senator Wilson? Uh, my, my, uh, I would not think that would be taxed if you're, if you're outta state when you do this, but I hear again, it's a good question. I, I would, my best guess would be no in that case, but here again, that doesn't change any of the law that currently is. Nothing changes as far as how it's, the law's always been. This just clarifies what the law has been, so.

Okay. Okay. Oh, thank you for that. Thank you. And I'll probably want some just, you know, uh, more information later to kind of figure out how that works.

Um, I do have a question about the fiscal note. Um, and I do see that revenue will be generated because of this. I'm just wondering why is there a $1 million one-time cost? What is that for Senator Wilson?

Uh, that, that's a great question. I, I, I'm not quite sure what it was. They obviously felt like, uh, there's gonna be one time cost and ongoing. My, my only guess would be is, like I said, this is, this is closing a loophole. I have to be a little bit careful, uh, um, because there was litigation and this is a settlement in the LI litigation case. And so, um, I'm not quite sure where the billion dollars, but I do know ongoing is closing that loophole that the companies have agreed that they will pay.

Okay. Alright. Thank you very, very much.

Thank you, Mr. President. I'm looking online, 1807 and thinking about our schools, our universities, hospitals, says amounts paid or charged for storage, that's prewritten computer software delivered electronically. Um, when I think about who's using some of these software licenses and some of these computer software delivered electronically, um, would, I mean, if the hospital is for profit and would they be paying for the first time they download it or each time they use it? It seems that, uh, this, this seems, uh, not to have good guardrails around it. So I'm not sure how a school would do with this, or if a student was asked to use a program after school, would they all be taxed every time they used it one time? So I, I'm just confused about that with this, uh, pre written computer software delivered electronically. It, that's my question. How, how frequently would they be Taxed? Thank you. Senator

I apologize if I could please have the good senator repeat the question.

So online 1807, it's talking about pre-written computer software delivered electronically. Uh, and my concern is that these are, would be schools, hospitals, um, homeschoolers, and if the school buys the process, the product, and then students use it, is it forever? Uh, if you are asked to use a program at, at home to go with school, are those gonna be taxed at the same rate as like, um, Netflix or Amazon?

Uh, I, I would guess they would be exempt. Obviously schools are exempt from sales tax, I assume they're in this condition.

Well, the problem is you're gonna be using them at home and so it just, it, it, this streaming service leaves me curious about how we deal with some of these things that are, you kind of walk in two different worlds. So just my question about that. Thank you, Senator Wilson.

Thank you, Mr. President. Uh, just, just, uh, some again, I mentioned that this is brought to me by the task commission. Um, this was, uh, uh, litigated. This is a, a, uh, uh, a response to the litigation to try and clarify the language that most, uh, companies were abiding by. There were a few that was, uh, used as a loop loophole. We've closed that loophole with just clarifying, uh, both the companies are on board, uh, with this language. And, um, ask for your support, uh, motion that first substitute Senate Bill 1 62. Be read a third time.

President Adams Aye.

is is addressing an area of confusion, uh, in Utah sales tax statutes with regard to streamed and downloaded products. Um, there was a couple of companies that had a confusion. We've talked with the companies they've provided, we negotiated this, this language, uh, just basically clarifies that platforms maybe structuring their transactions to take advantage of the difference. So what we've done is clarified to make it a level playing field between streamed and downloaded products and for the businesses that sell them. It also promotes compliance by eliminating a no area, a known area of confusion in the sales tax code. Without Mr, that would conclude my presentation. Mr. President,

Thank you, Mr. President. Uh, I move that, uh, first substitute Senate Bill 1 62 pass.

Senator Vickers. Baldy. Lewin Bremmer Aye. Bus A Colmore. Escamilla A Fillmore Grover Harper Aye. Kins. Ipson Aye. Johnson k Juab McKay Mikel Milner Musselman Milner Owens Pitcher Aye. Um, Rebi Sandal Stevenson Stratton Vickers Weiler Wilson Winterton Al Aye. President Adams Aye.

Uh, good morning, Mr. President. Good morning. Thank you. Personal privilege.

Thank you Mr. Speaker. Uh, Mr. Speaker representatives, uh, you, you may remember the, the day when we used to go to Blockbuster to rent a movie for some of our newer members. You may not remember that, but you'd actually go to a store, rent a VHS tape, take it home, watch it, take it back. Uh, then we evolved to Red Box, where you'd go to a machine and get the CD and take it back. Historically, these, uh, transactions, just like the sale of, uh, books and uh, and movies are were subject to sales tax. This bill addresses, uh, an area of confusion in Utah's sales tax statute regarded, streamed, and downloaded products. Um, the, uh, the bill basically clarifies that whether it's streamed or downloaded, that it is still subject to sales tax. The this bill was brought to us by the tax commission. Uh, they found that most sellers are already collecting the sales and use tax on both streamed and downloaded products. But a small number of streaming platforms are not. Uh, SB 1 62 eliminates this confusion by clarifying the digital video. Audio books, gaming are subject to sales and use tax regardless of whether they're streamed or downloaded. This bill creates a level playing field between streamed and downloaded products, uh, for the businesses that sell them. It also promotes compliance by limited, eliminating a known area of confusion in the sales tax code. Uh, this would only apply to, uh, a, a number of, uh, entities that are, are not compliant with this and again, would, uh, create a a level, level playing field. Uh, thank you, uh, Mr. Speaker.

I did not mean to touch that. Thank you. Okay.

Thank you, Mr. Speaker. The sponsor yield to a series of questions. Representative Monson, will you yield to a series of questions?

Yes. Yes. Representative.

So is it your understanding that these things were already taxed and there was just confusion, or that these things at some point in the past were not taxed and we are adding the tax onto them?

Uh, thank you Mr. Speaker. Uh, yes. We have always historically, uh, taxed these items. Uh, as technology evolved and more products were streamed, uh, uh, a small number of entities believe that was a loophole, that they were exempt from collecting sales tax. So now it's created a disparity where the vast majority are collecting it. But a few, uh, uh, retailers of this product have have decided that they're exempt. So this clarifies that and, uh, treats it the way that we have done it ever since we went back the good old days when we would go to Blockbuster. Thank you, Mr. Speaker.

So, colleagues, um, this bill could be read two ways. One of the ways is that we're taxing something new and this would be a tax increase. Um, and if that were the case, I would be all excited about broadening the base, and then I would ask that we also lower the rate. But I think the sponsor has, um, answered my question in a way that makes me think that that's not what's happening here. That this is something that we had always intended to be taxed. It was already being taxed, but we weren't doing an adequate job of collecting it, and the tax commission lacked the tools that they needed to enforce the collection. So with that interpretation, I, I think this is actually an, an acceptably good bill because it gives the tax commission the tools to enforce collection of attacks that we as a legislature have already imposed in the past. It just, there, it wasn't, they weren't given the proper tools to be able to collect it completely. And I maybe the sponsor would like to respond to that in his summation, but thank you, Mr. Speaker.

Uh, thank you, Mr. Speaker. I'm, I'm glad the comments were made about, uh, lowering the weight, lowering the rate, and widening the base. Uh, again, this does not impose a new tax. This clarifies, uh, a, a, a small loophole in how relating to technology of how the products delivered. It's really important to note that the further a loophole like this gets exploited, it puts additional pressure on our local, uh, governments and the state government when additional funds are needed to keep up with inflation if they're not collecting what is already due. So I think this, uh, helps protect, uh, the sales tax base. And again, most vast majority are collecting this. This just clarifies it for a very small percentage that is, are exploiting the loophole. Thank you, Mr. Speaker.