What did Idaho's AG flag about the 2013 ballot initiative to overhaul state sales tax?

Plain-English summary

A petition filed with Secretary of State Ben Ysursa on August 26, 2013, proposed changes to Idaho's sales tax statutes. The certificate says the petition was drafted against an outdated version of the statutes and omitted amendments from the 2011, 2012, and 2013 legislative sessions. It recommended revising the draft to reflect the statutes then in effect.

On the substance, the certificate raised several drafting concerns:

• Personal-property versus sales-tax provision mismatch. Section 1's proposed amendment to Idaho Code § 63-602L addressed personal-property tax, not sales tax. Personal-property tax is a separate tax. The petitioners likely wanted to omit this section if their goal was sales-tax-only reform.
• Computer software and digital goods bifurcation. Section 2 pulled "computer software" out of the tangible-personal-property definition in § 63-3616 and created a separate taxable category, then defined "digital goods" again separately. Historically digital goods fell under the computer-software definition as "information stored in an electronic medium." Treating them as separate could create internal inconsistencies and definitional gaps. Both items would still be taxable, so the issue might be immaterial in practice, but the sourcing sections would carry the same drafting risk.
• Real property contracts. Section 4 would shift the sales tax obligation from contractor to purchaser when real property contracts became taxable under proposed § 63-3612(2)(k). This could mean newly built homes are taxed as retail sales while existing-home sales are not, since a builder-developer could buy materials and subcontract services for resale. The certificate flagged this as an unintended consequence likely to surprise homebuyers.
• Government contracts and incomplete text in § 63-3613. The certificate says proposed subsection (a)(6) would treat listed work on tangible or real property as retail sales. Because sales to governmental entities are exempt, it says that change would exempt the described government contracts from taxation, though contractors' materials were taxable under then-current law. It also says proposed subsection (f) was incomplete.
• Service sourcing under § 63-3642. The certificate calls the proposed rules in Sections 18, 19, and 20 unduly complex. It says the terms "performed" and "consumed" in proposed § 63-3642(5) could benefit from definitions and that recent legislation on remotely accessed software needed attention in the sourcing rules.

Currency note

This opinion was issued in 2013. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The petition addressed computer software, digital goods, real-property contracts, government contracts, and the location at which service sales would be treated as occurring. The certificate did not take a policy position. It identified specific differences between the draft and existing statutes, and asked the petitioners to review definitions and sourcing rules for consistency.

The certificate says the draft failed to account for statutory changes from the three preceding legislative sessions. It asks petitioners to revise their proposed amendments to reflect the law in effect at the time of review.

Common questions

Q: Does the certificate say whether the initiative made the ballot? A: No. It records the AG's review of the petition and does not report later ballot progress.

Q: Why was the personal-property tax provision a problem? A: The certificate says the proposed amendment to Idaho Code § 63-602L concerned personal-property tax, while the other proposed amendments concerned sales tax. It asks whether petitioners intended to include that separate tax provision.

Q: What's the practical concern with bifurcating computer software and digital goods? A: The certificate says digital goods had historically been interpreted as falling within computer software, so separate definitions could create internal inconsistencies. It suggested making digital goods a subset of computer software if that was the petitioners' intent, while noting that both would be taxable under the proposal.

Q: Which proposed section raised the service-sourcing concern? A: The certificate points to Sections 18 through 20 and proposed Idaho Code § 63-3642(5). It says the terms "performed" and "consumed" could benefit from explicit definitions and asks petitioners to address remotely accessed software in the sourcing rules.

Citations and references

Statutes:

• Idaho Code § 34-1809 (initiative review)
• Idaho Code § 63-602L (intangible personal property exemption)
• Idaho Code § 63-3612(2)(k) (real property contracts)
• Idaho Code § 63-3613 (retail sales and government contracts)
• Proposed Idaho Code § 63-3642 (service sourcing)
• Idaho Code § 63-3616 (tangible personal property)

Source

• Landing page: https://www.ag.idaho.gov/office-resources/opinions/
• Original PDF: https://ag.idaho.gov/content/uploads/2018/04/C09242013.pdf

Original opinion text

STATE OF IDAHO
OFFICE OF THE ATTORN EY GENERAL
LAWRENCE G. WASDEN

September 24, 2013

The Honorable Ben Ysursa
Idaho Secretary of State
Statehouse
VIA HAND DELIVERY
RE:

Certificate of Review
Proposed Initiative Amending the Idaho Sales Tax Statutes

Dear Secretary of State Ysursa:
An initiative petition was filed with your office on August 26, 2013 . Pursuant to Idaho Code § 34-1809, this office has reviewed the petition and prepared the following advisory comments. Given the strict statutory timeframe within which this office must review the petition, our review can only isolate the areas of concern and cannot provide in-depth analysis of each issue that may present problems. Further, under the review statute, the Attorney General's recommendations are "advisory only." The petitioners are free to "accept them in whole or in part." This office offers no opinion with regard to the policy issues raised by the proposed initiative nor the potential revenue impact to the state budget. BALLOT TITLE

Following the filing of the proposed initiative, this office will prepare short and long ballot titles. The ballot titles should impartially and succinctly state the purpose of the measure without being argumentative and without creating prejudice for or against the measure. While our office prepares titles for the initiative, petitioners may submit proposed titles for consideration. Any proposed titles should be consistent with the standard set forth above. MATTERS OF SUBSTANTIVE IMPORT

One overarching complication of this review is that Petitioners used a prior version of the statutes when constructing the proposed initiative ("initiative"). Thus, it does not include many recent amendments made to the relevant statutes by the 2011, 2012, and 2013 legislative sessions. Petitioners will need to revise the initiative to include the most recent version of the relevant statutes.

P.O. Box 83720, Boise, Idaho 83720-0010
Te lephone: (208) 334 -2400, Fax: (208) 854-8071
Located at 700 W. Jefferson Street, Suite 210

The Honorable Ben Y sursa
September 24, 2013
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The proposed amendment in Section 1 to Idaho Code § 63-602L will not affect Idaho sales tax because that code section relates to personal property tax. This code section exempts from property taxation certain intangible personal property. Personal property tax is a distinct tax that is applied separately from Idaho's sales tax. Petitioners may want to omit this amendment in order to limit the effect of the initiative to Idaho sales tax only, ifthat is the intent of the initiative. Section 2 proposes a new section to Idaho Code pertaining to Computer Software and Digital Goods. This amendment pulls "computer software" out of the tangible personal property definition in Idaho Code § 63-3616 and creates a new taxable item outside tangible personal property. Section 2 defines "computer software" to include information stored in electronic media. The initiative also defines "digital goods" separately from computer software. Historically, digital goods have been interpreted to fall under the definition of computer software as "information stored in an electronic medium." Bifurcating these definitions could create internal inconsistencies. Petitioners may wish to review these definitions to make digital goods a subset of computer software if that is their intent. However, the initiative makes both items taxable, which may make the issue immaterial. The drafters should also note that this area of taxation presents difficulty in defining these terms in this rapidly changing industry. This will also be a problem in the proposed sourcing sections as well. The proposed amendment in Section 4 will shift the tax obligation from the contractor to the purchaser since real property contracts would be taxable under the proposed changes to Idaho Code § 63-3612(2)(k). It is possible the proposed initiative may tax the sale of new homes and not tax the sale of existing homes. If a builder builds a home that he intends to sell upon completion, he may be able to purchase the materials and the subcontract services for resale. Under the language of the proposed initiative, the sale of the newly constructed home may be categorized as a retail sale. The sale of an existing home would not be a retail sale. The proposed changes to Idaho Code § 63-3613, subsection (a)(6), includes contracts for applying, installing, cleaning, altering, improving, decorating, treating, storing, or repairing tangible personal property or real property. Recall that Idaho Code §§ 63-3622A and 63-36220 prohibit the imposition of taxes on retail sales to governmental entities. By including contracts described in subsection (a)(6) as retail sales, the initiative will completely exempt those contracts performed for governmental entities from taxation whereas under present law, materials used on government contracts are taxable. Contractors working at the Idaho National Laboratory (INL), Mountain Home Air Force Base, and contractors building or repairing highways or other roads are just a few examples of contracts that would completely escape taxation under the proposed initiative. Petitioners should also revise the proposed changes to Idaho Code§ 63-3613, subsection (f), which is incomplete. Section 8 of the initiative, which creates a new section, Idaho Code § 63-3614A, limits the imposition of tax on services to certain activities engaged in for consideration. The new

The Honorable Ben Ysursa
September 24, 2013
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statute will not tax services performed for an "employer" by an "employee." The initiative does not contain a specific definition for either term. For instance, the classification of a worker as an employee or as an independent contractor is often problematic. The activities of an independent contractor may mirror that of an employee. Under a strict interpretation of the initiative, the activities of the independent contractor would be taxable while the activities of the employee would not be taxable, even though the services performed are identical. Petitioners may wish to clarify these terms and address their intent with regard to worker classification in order to avoid confusion. Additionally, Section 8 does not include services provided by certain licensed medical professionals. It would appear that the drafters seek to exempt medical-related services. However, by exempting the service providers rather than the service provided, the exemption could extend to any service provided by a licensed medical professional. For instance, a registered nurse could operate a day care out of her home. Those services provided by the nurse would be exempt under the proposed Idaho Code § 63-3614A. On the other hand, a day care operated by a non-licensed medical professional (such as a teacher or a full-time child care provider without a medical designation) would be fully taxable. Additionally, the list of service providers excludes some health care professionals and includes other health care professionals. Physical therapists are included, but occupational and speech therapists are not. This could be an impediment to passage by those excluded from the exemption and should be more broadly worded to include all health care professionals "licensed" by certain state boards. The addition of the phrase "including sales of services" in Section 11 is redundant. The amendment to Idaho Code § 63-3612 includes the sales of services in the definition of "sales." The additions in this section may not be necessary. The inclusion of the term "or service(s)" in Section 12 and Section 13 may not achieve the result intended by the drafters and may cause unnecessary confusion. By way of example, Idaho Code § 63-3621(f) relates to inventory held for resale. It is not clear how holding inventory for resale relates to services and the imposition of Idaho's use tax. Similarly, the addition of "or services" to Idaho Code § 63-3622(c) relates to tangible personal property sold for resale. The drafters' intent in adding "or services" is not apparent in relation to the resale of tangible personal property and could benefit from additional clarification. The proposed Idaho Code § 63-3622D does not exempt any services except those services consumed in a production process. There are many statutes that provide exemptions of tangible personal property but would not be exempt from related services. For example, the occasional sale exemption exempts the transfer of tangible personal property between related entities. The proposed initiative would impose tax on service transactions between related entities. There are other exemptions that similarly exempt transactions involving tangible personal property, but related service transactions would be taxed under the initiative. Some obvious examples include the pollution control exemption, the research and development exemption, and the logging exemption. The drafters of the initiative have the prerogative to maintain any of the exemptions for sales of tangible personal property while taxing sales of

The Honorable Ben Y sursa
September 24, 2013
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related services, but the Petitioners may wish to consider some consistency for service-related transactions. The drafters also included sourcing provisions in Sections 18, 19, and 20. These sourcing rules seem unduly complex. Moreover, the sourcing rules may or may not be consistent with other provisions of the Idaho sales tax laws. Sourcing is defined as the point where the retail sale occurs. Subsection (5) of proposed Idaho Code § 63-3642 states that services "performed and consumed" in Idaho will be sourced to that location in Idaho. Services "performed" in another state yet "consumed" in Idaho will be sourced to Idaho where the "consumption" occurred. Services "performed" in Idaho yet "consumed" in another state will be sourced to that other state. The terms "performed" and "consumed" appear to be terms of art that could benefit from an explicit definition. Additionally, this section affects services related to sales of computer software and digital goods. It's worth noting that the recent 2013 legislative changes also included provisions for remotely accessed software, which will need to be addressed in the sourcing rules. Relating to more general matters, Petitioners may wish to revisit the statement of purpose and the ten exemptions (broadcast equipment, commercial aircraft, railroad rolling stock and manufacturing, driver's education automobiles, trade-in value, ski lifts and snow grooming equipment, heating materials, utility sales, precious metal bullion, and telecommunication equipment) that it seeks to eliminate. These items are explicitly exempted in other statutes, which the drafters did not repeal in the proposed initiative. Additionally, the proposed statutes appear to raise revenue for the State of Idaho. The initiative itself does not identify the revenue impact, yet as described in the cover letter submitted concurrently with the initiative, it is estimated the initiative could raise upwards of $740 million in revenues. This raises the question of whether an initiative that raises revenue will be struck because it did not originate in the House of Representatives. Article III of the Idaho Constitution provides that all bills which raise revenue must originate in the House. There is an argument that an initiative not originating in the House, which raises revenue, will be prohibited. By using the term "bill," the drafters of the Constitution implied that the provision only applies to legislative enactments. An initiative, as allowed for in art. III, sec. 1, is a process for the people through signatures and voting to enact legislation. The history of the federal Origination Clause is all about balance between the two legislative houses. Idaho seems to have just copied the federal practice. The Idaho Constitutional Convention in 1889 adopted this section without debate or amendment. At the federal level, the clause had two motives. First, it put the fiscal authority in the House of Representatives, which was seen as being the house closest to the people. Second, it acted as a counterbalance to the special powers granted only to the Senate - the power to advise and consent to Presidential appointments and to ratify treaties. Thus, the rationale for requiring revenue-raising measures in the House seems inapplicable to initiatives. If, in fact, one of the motives is to give the power to the body closest to the people, then it seems logical that the initiative process could be used to raise revenue.

The Honorable Ben Ysursa
September 24, 2013
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CERTIFICATION

I HEREBY CERTIFY that the enclosed measure has been reviewed for form, style, and matters of substantive import. The recommendations set forth above have been communicated to the Petitioner via a copy of this Certificate of Review, deposited in the U.S. Mail to Robert C. Huntley, P.O. Box 2188, Boise, Idaho 83701. Sincerely,

Attorney General
Analysis by:

CHELSEA E. KIDNEY
Deputy Attorney General