Governor Glenn Youngkin has issued his proposed Virginia 2024 – 2026 Budget Bill. The Budget Bill would make three notable changes to Virginia’s tax structure, all of which would take effect on January 1, 2025: (1) increase the sales and use tax rate; (2) expand the sales and use tax base to digital products; and (3) reduce the personal income tax rates. Virginia currently does not impose sales tax on downloaded or electronically accessed digital products and software.^[1]

Sales and Use Tax Rate Increase. The Budget Bill would increase the state sales and use tax rates from 4.3% to 5.2%. This rate increase, plus the additional 1% sales and use tax imposed by local governments, would result a new total sales and use tax rate of 6.2%.

Sales and Use Tax Base Expansion. The Budget Bill would expand the sales and use tax base by: 

• Including “digital personal property” in “tangible personal property,” with the former defined as “digital products delivered electronically, including software, digital audio and audiovisual products, reading materials, and other data or applications, 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”; and 
• Expanding the base to enumerated “taxable service[s],” which include: “1. Software application services; 2. Computer-related services; 3. Website hosting and design; 4. Data storage; and 5. Streaming services.” However, the term does not include, “any service transaction where the purchaser or consumer of the service is a business, or any other service otherwise exempt [from sales and use tax].”

Eversheds Sutherland Observation: While details need to be worked out, the Budget Bill attempts to avoid taxation of digital business inputs in two ways. First, by characterizing “digital personal property” as “tangible personal property,” much of the existing Virginia sales and use tax law would apply to those transactions including, among other things, the resale exemption.^[2] Second, the Budget Bill excludes business-to-business transactions involving “taxable services,” thereby avoiding tax pyramiding for Virginia businesses, including the commonwealth’s large data center market. 

Personal Income Tax Rate Reduction. The Budget Bill would also reduce the personal income tax rate by approximately 12% for all earning brackets for taxable years beginning on and after January 1, 2025. For example, the highest marginal rate would be reduced under the plan from 5.75% to 5.1%. 

The Eversheds Sutherland SALT team will continue to monitor the pending Virginia budget and update on any resulting tax changes.

^[1] See Va. Code Ann. § 58.1-648(C), which excludes “digital products delivered electronically, such as software, downloaded music, ring tones, and reading materials” from the communications sales tax. This provision would be repealed as part of the Budget Bill proposals.  

^[2] See, e.g., Va. Code Ann. § 58.1-602 (excluding from “retail sale” any “sale to any person for any purpose other than for resale in the form of tangible personal property or services [subject to sales and use tax]”; see also § 58.1-623 and V.A.C. 23 § 10-210-280 (relating to resale exemption certificates).