The Joint Subcommittee on Tax Policy delved into Virginia’s sales tax structure at its second meeting of the year, receiving presentations from the Department of Taxation and the Tax Foundation on the structure of Virginia’s sales tax and how Virginia’s sales tax base compares with those of neighboring states, particularly with respect to the tax treatment of services.
As explained by Anna Dunkum, Lead Tax Policy Analyst with the Department of Taxation, most services are not subject to Virginia’s sales and use tax; data limitations make foregone revenue associated with this exemption difficult to calculate, but the Department provided estimates to the Joint Subcommittee. As noted in the presentation, imposing state sales tax on personal services (such as hairdressing, motor vehicle repair, and dry cleaning) would generate more than $900 million in revenue in FY 2026, while capturing business services (such as advertising, maintenance and janitorial services, and taxi and limousine services) would generate more than $2.9 billion, and sales taxes on professional services (such as accounting, computer science, health care, and legal services) would generate $7.3 billion. Neighboring states vary in their treatment of individual services within these categories.
Ms. Dunkum also discussed the taxation of digital services, the topic of substantial discussion during the 2024 General Assembly session. Digital services, such as digital downloads, streaming, website hosting and design, and cloud-based services (such as data storage), are generally not taxable in Virginia, but neighboring states capture at least some of these services in their respective sales tax bases. As noted in the presentation, streaming services could be categorized under the retail sales and use tax, or the Communications Sales and Use Tax. Another issue the state may need to consider in imposing sales taxes on digital services is sourcing of the transaction, which may be a complicated question if the seller is out-of-state and the purchaser’s location of use is unknown.
Dr. Andrey Yushkov of the Tax Foundation discussed national trends in sales taxes, noting that services’ share of consumption (relative to goods) has grown over the last several decades, but services are not taxable in most states, resulting in an erosion of sales tax bases. Dr. Yushkov told the Joint Subcommittee that Virginia’s sales tax base is particularly affected, with the breadth of its base (the share of the state’s economy captured in the sales tax base) the third lowest in the nation. He offered several principles for sales tax reform, including the importance of broadening the sales tax base (to allow for lowering rates) and a strong preference for exempting business inputs and business-to-business transactions from sales taxes, arguing that imposing taxes on such intermediate transactions makes the sales tax a tax on production rather than consumption, and is less transparent than other methods of imposing taxes on businesses (such as corporate income tax). Several members raised the issue of considering local taxes – in particular, BPOL and machinery and tools taxes – in tandem with sales taxes in order to provide a fuller picture of taxation on businesses.
Delegate Watts also shared copies of a presentation she had delivered at a National Conference of State Legislatures event earlier this year regarding Virginia’s experience in considering taxation of digital services.
Staff to the Senate Finance and Appropriations Committee provided an overview of fiscal impact estimates for the numerous bills that were referred to the Joint Subcommittee during the 2024 session. Another meeting of the Joint Subcommittee is planned prior to the 2025 Session.
VACo Contact: Katie Boyle