Virginia may tax digital goods, raise sales tax rate in 2025

Though we’re just getting acclimated to 2024, states are starting to propose tax changes for 2025. Case in point: Virginia Governor Glenn Youngkin’s 2024–2026 budget bill seeks to increase the state sales and use tax rate in Virginia as well as broaden sales and use tax to a variety of digital products and services.

“We need to structurally reform our tax code,” Youngkin said during the State of the Commonwealth address on January 10, 2024. “We can do this by cutting taxes across the board by 12% and paying for almost 80% of this by modernizing our tax code, which includes closing the tech tax loophole and increasing the sales and use tax by 0.9%.”

By closing the “tech tax loophole,” Youngkin means taxing digital products and services.

If Governor Youngkin gets what he wants, “digital personal property” will be subject to Virginia sales and use tax starting January 1, 2025.

For tax purposes, the budget bill (HB 30) defines “digital personal property” as electronically delivered digital products “that the purchaser owns or has the ability to continually access, whether by downloading, streaming, or otherwise accessing the content, without having to pay an additional subscription or usage fee to the seller after paying the initial purchase price.”

These include:

• Digital audio and audiovisual products
• Reading materials
• Software
• Other data or applications

Virginia would also tax the following services:

• Computer-related services
• Data storage
• Software application services
• Streaming services
• Website hosting and design

However, these services would not be subject to tax if the purchaser or consumer of the service is a business.

So far, Iowa is the only state that has excluded business purchases when they expanded their sales tax to digital goods.  “Businesses are huge purchasers of digital goods,” notes Scott Peterson, VP of Government Relations at Avalara. “That’s why Iowa decided to exempt business purchases.” According to the U.S. Bureau of Economic Affairs, the digital economy was responsible for 10% of the U.S. GDP, or $2.6 trillion, in 2022 alone.

Should the budget bill be enacted, Virginia’s statewide sales and use tax rate would jump from 4.3% to 5.2% as of January 1, 2025. In areas where there’s a 1% local sales and use tax, the total sales and use tax rate would be 6.2%.

To help offset the higher sales tax rate, the budget proposal would cut Virginia’s personal income tax rate by about 12%. In this, the Old Dominion isn’t an outlier.

Numerous states have lowered their income tax in recent years. On October 7, 2022, the National Conference of State Legislatures reported “at least 20 states have cut personal or corporate income tax rates, or both, since the start of 2021.” Another 17 states are cutting individual or corporate income taxes, or both, in 2024.

It’s worth noting that the sales tax changes proposed by Governor Youngkin aren’t the only sales tax changes on the table in Virginia.

Several bills, including HB 458, HB 600, HB 805, and SB 14, would allow all counties and cities in the commonwealth to impose an additional local sales and use tax of up to 1%.

HB 540 and SB 110 would exempt food for human consumption as well as essential hygiene products like diapers, sanitary napkins, and tampons.

HB 889 would extend the retail sales and use tax to numerous services, including admissions, companion animal care, dry cleaning and laundry services, and landscaping.

If Virginia enacts any of these or other sales tax changes, Avalara Tax Desk will let you know.