What problems did the Idaho Attorney General flag in June 2015 about the League of Women Voters' proposed initiative to lower Idaho's sales tax rate from 6% to 5% while broadening the base to include taxes on services and real-property contracts?

Subject

Certificate of Review under Idaho Code § 34-1809 of a proposed initiative submitted by the League of Women Voters of Idaho. The initiative had two principal aims: (1) lower the overall Idaho sales tax rate from 6% to 5%; and (2) broaden the sales tax base by including "services" in the definition of taxable sales and by sweeping contracts for applying, installing, cleaning, altering, improving, decorating, treating, storing, or repairing real property into the definition of "sales."

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context describing the 2015 advisory review, not as a current statement of Idaho law. The Idaho Code provisions cited here have been amended in the years since.

Plain-English summary

The League of Women Voters of Idaho proposed a comprehensive sales-tax overhaul in 2015. The AG's review covered drafting, constitutional, and structural concerns across roughly 25 separate sections of the proposal.

Single-subject concern. Sections 1 and 23 of the initiative amended Idaho Code § 63-602L, which is a personal property tax statute, not a sales tax statute. Reaching outside the sales tax could violate Idaho Constitution art. III, § 16 (single-subject rule). The AG recommended dropping those sections, or broadening the initiative's title so voters were on notice that the measure addressed more than sales tax.

Outdated code text. The petitioners had drafted using prior versions of several statutes; recent amendments, some significant, were not reflected. Sections 6, 7, 10, 12, and 14 needed updating before the initiative could be circulated.

Computer software and digital goods. Section 2 pulled "computer software" out of the tangible personal property definition and made it taxable separately. The AG noted that historically digital goods have been treated as a subset of computer software, and the bifurcation in the initiative might create internal inconsistencies. The AG also noted the initiative would reverse recent legislative trends exempting most software and digital goods, which the petitioners might want to reconsider.

Real-property contracts as taxable sales. This was a structural issue. By treating contracts to install, alter, repair, or improve real property as retail sales, the initiative would:

• Shift the tax obligation from contractors (who had previously paid sales tax on materials) to purchasers, dramatically increasing the tax on each project.
• Treat newly built homes (sale by the builder) as retail sales while existing-home sales remained untaxed, creating a new and probably unintended distinction.
• Exempt virtually all government construction contracts from sales tax, because Idaho Code §§ 63-3622A and 63-3622O prohibit imposing tax on retail sales to government entities. Idaho National Laboratory contracts, Mountain Home Air Force Base contracts, and highway construction contracts would all escape taxation, even though materials used on government contracts were taxable under existing law.

Definition of "services." Section 8 (creating proposed Idaho Code § 63-3614A) defined "services" as "all activities engaged in for other persons for a consideration, which activities involve predominantly the performance of a service as distinguished from selling or leasing property." The AG flagged the definition as both circular (using "service" to define "service") and impossibly broad. Adding precision was essential.

The same section excluded services performed by certain licensed medical professionals. The AG noted this exempted service providers rather than service types, with the odd result that a registered nurse running a daycare would be exempt while a non-medical-professional daycare provider would be taxable. Some health professionals (physical therapists) were included, others (occupational and speech therapists) were not. The AG recommended exempting all "licensed" health care professionals as a class, or exempting categories of medical service rather than individual licensee categories.

The AG also noted a Section 8 internal contradiction. The broad "all services" sweep was at odds with Section 24, which listed many specific service categories (agricultural, industrial, transportation, information, health, medical, social, educational) as exempt.

Sourcing rules. Sections 18, 19, and 20 set out where a retail sale occurs for purposes of taxation. The AG flagged the rules as unduly complex, as creating undefined terms ("performed" and "consumed"), and as not addressing recently enacted provisions on remotely accessed software.

Repeal of exemptions. Section 22 sought to repeal approximately 26 sales tax exemptions. Two of those were already addressed elsewhere in the initiative (redundant). Several covered interstate-commerce items (railroad rolling stock, large motor vehicles, sales to out-of-state contractors); repealing those exemptions could violate the dormant Commerce Clause, which prohibits states from excessively burdening interstate commerce.

Sections 24 and 25 contained no statutory language. They were statements of intent, not enactable law. Idaho Code § 34-1804 distinguishes referenda (acts of the legislature) from initiatives (proposed laws). An initiative must contain law. The petitioners would need to convert those sections into specific statutory language.

Origination clause question. Idaho Constitution art. III provides that all bills which raise revenue must originate in the House of Representatives. The AG raised, and ultimately answered "no," whether this clause bars a revenue-raising initiative. The reasoning: the constitutional language uses "bill," which suggests legislative enactment rather than initiative; the federal-model historical purpose was to put fiscal authority in the chamber closest to the people; the Idaho Constitutional Convention adopted the section without debate; and an initiative, expressly authorized by art. III, § 1, is by definition the people themselves enacting law, which is the body closest to the people. So an initiative could raise revenue without originating in the House.

Section 21 (staggered implementation). The initiative made the new tax on services applicable based on contract dates and contract type. The AG flagged this as administratively burdensome for both taxpayers and tax administrators.

The AG's review was advisory. Idaho law lets the petitioners accept the recommendations in whole or in part. The League submitted a revised version on October 7, 2015; the AG's October 30, 2015 Certificate of Review addresses the changes between the two versions and incorporates this June review by reference.

Common questions

Q: What is Idaho's sales tax rate today?

This 2015 review described an initiative that proposed lowering the rate from 6% to 5%. Whether the rate is currently 6% or different is a matter of current Idaho Code, not this historical opinion. Verify the current statute.

Q: What is the single-subject rule?

Idaho Constitution art. III, § 16 requires that every act embrace only one subject and matters properly connected with it, expressed in the title. The rule prevents legislators (or voters) from being asked to vote up or down on a bundle of unrelated provisions. Initiatives are subject to the same rule.

Q: What is the dormant Commerce Clause?

A judicially developed doctrine that says even when Congress is silent, the federal Commerce Clause limits state laws that discriminate against, or excessively burden, interstate commerce. State tax laws that fall heavily on out-of-state businesses (or fall heavily on items moving across state lines) get the most scrutiny.

Q: Could a state really exempt government construction contracts from sales tax?

The opinion flagged this as a side effect of the initiative's structure, not a deliberate policy choice. Existing Idaho law required contractors to pay sales tax on materials used in government projects. By recharacterizing the contract itself as a "retail sale" and applying the prohibition on taxing sales to government entities, the initiative would have eliminated that revenue source entirely. The AG was alerting the petitioners to a probably unintended consequence.

Background and statutory framework

Idaho Code § 34-1809 governs the Certificate of Review process. Idaho Code § 34-1804 distinguishes initiatives from referenda. Idaho's sales and use tax structure is in Idaho Code title 63, chapter 36.

Idaho Constitution art. III, § 1 establishes the initiative power. Art. III, § 16 is the single-subject rule. Art. III's origination clause requires revenue-raising "bills" to begin in the House.

The dormant Commerce Clause is a federal constitutional doctrine articulated in cases like Complete Auto Transit, Inc. v. Brady and Quill Corp. v. North Dakota (later modified by South Dakota v. Wayfair).

Citations

Idaho Constitution:
- Art. III, § 1; § 16

Idaho Code:
- § 34-1804; § 34-1809
- § 63-602L
- § 63-3612; § 63-3613; § 63-3616; § 63-3621; § 63-3622; § 63-3622A; § 63-3622O
- Proposed §§ 63-3614A, 63-3642

Source

• Landing page: https://www.ag.idaho.gov/office-resources/opinions/
• Original PDF: https://ag.idaho.gov/content/uploads/2018/04/C06102015.pdf

Original opinion text

STATE OF IDAHO
OFFICE OF THE ATTORNEY GENERAL
LAWRENCE G. WASDEN

June 10, 2015

The Honorable Lawerence Denney
Idaho Secretary of State
Statehouse
VIA HAND DELIVERY
RE:

Certificate of Review
Proposed Initiative Amending the Idaho Sales Tax Statutes

Dear Secretary of State Denney:
An initiative petition was filed with your office on May 15, 2015. 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." The opinions expressed in this review are only those that
may affect the legality of the initiative. 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
The two principal purposes of the proposed initiative are (1) to lower the overall
sales tax rate from six percent (6%) to five percent (5%); and (2) to broaden the sales tax
base by including "services" within the sales tax scheme . In addition to taxing services ,
another significant way the initiative would broaden the sales tax base is to expand the
definition of "sales" to include contracts for applying, installing , cleaning, altering , improving ,
decorating, treating , storing , or repairing real property. See proposed Idaho Code § 63-

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

Secretary of State Denney
June 10, 2015
Page 2 of 6
3612(k). This provision has the effect of transforming many contracts for the improvement
of real property into retail sales and subject to sales tax.
One overarching complication of this review is that the petitioners used prior
versions of some of the statutes when constructing the proposal. Thus, it does not include
many recent amendments made to the relevant statutes. Some of the recent amendments
are minor; however, some of the statutory changes are significant. The petitioners will need
to revise the proposal to include the most recent version of the relevant statutes (see
Sections 6, 7, 10, 12 and 14).
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. Likewise, Section 23 has
implications beyond sales tax. The petitioners may want to omit these amendments in
order to limit the effect of the initiative to Idaho sales tax only, if that is the intent of the
initiative. Omission of the elements would resolve any claim that this initiative violates the
single subject rule under Art. Ill Sec. 16. 1
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 proposal 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. The petitioners may wish to review these
definitions to make digital goods a subset of computer software if that is their intent.
However, the proposal 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. Finally, it should be noted that the imposition of tax on these types of
transactions is a departure from the direction taken by the legislature the past few years as
they have passed multiple bills exempting most sales of software and digital goods.
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). This will produce not only a tax shift, but the
amount of tax paid on each contract will increase significantly. Moreover, 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

1

If these provisions remain, the title of the initiative may need to be broadened to inform voters that the
initiative addresses more than sales tax, in order to permit a legal defense to be proffered under Art. Ill, Sec.
16.

Secretary of State Denney
June 10, 2015
Page 3 of 6
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 §§ 633622A 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.
The 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 Idaho Code § 63-3614A, broadly
defines the term "services" to mean "all activities engaged in for other persons for a
consideration, which activities involve predominantly the performance of a service as
distinguished from selling or leasing property." This definition incorporates nearly every
conceivable service. Moreover, this definition of "service" is, in part, circular, as the
definition uses the same term it is defining (i.e., a "service" is an activity predominantly
involving the performance of a "service"). The petitioners may want to provide more
clarification in the definition of the term "service."
Of note, too, is that the new statute will not tax services performed for an "employer"
by an "employee." The initiative does not contain a specific definition for either term, both of
which are the subject matter of countless lawsuits. 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. The 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

Secretary of State Denney
June 10, 2015
Page 4of6
those excluded from the exemption and should be more broadly worded to include all health
care professionals "licensed" by certain state boards.
Finally, it should be noted that Section 8's definition of "services" is in contradiction
to the information contained in the petitioners' Section 24. As stated above, this initiative
generally seeks to impose a sales tax on the sale of services, and in Section 8, the term
"services" is defined in the broadest way possible. However, in Section 24, the petitioners
indicate many, many types of services would remain exempt, to include the comprehensive
and wide-ranging fields of agricultural services, industrial services, transportation services,
information services, health services, medical services, social services, and educational
services. The two sections seem incongruent.
In Section 10, the petitioners seek to exclude "computer software" from the definition
of "tangible personal property" in Idaho Code § 63-3616. As mentioned above, the code
section used in Section 10 is not current with Idaho Code. Moreover, the Idaho Legislature
has amended Idaho Code § 63-3616 in significant ways over the past three consecutive
legislative sessions. Not only is the language used in Section 10 not current with Idaho
Code, the changes proposed here would undo these very recent amendments (and would
make more items taxable). It is unclear if that result is compatible with the petitioners'
general intent.
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 drafter's 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 § 63-36220 in Section 14 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 transaction 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 related services, but the petitioners may
wish to consider some consistency for service related transactions.

Secretary of State Denney
June 10, 2015
Page 5 of 6
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 which 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 recent legislative changes also included provisions for remotely accessed
software which will need to be addressed in the sourcing rules.
In Section 21, the petitioners provide language governing which contracts will be
subject to the sales tax on services as well as which contracts are eligible for refunds. The
operative dates in this section are based upon the dates of the written contract, as well as
the nature of the services. This staggered implementation seems unduly complex and
would present a huge administrative burden both for taxpayers as well as for tax
administrators.
In Section 22, the petitioners seek to repeal approximately 26 sales tax exemptions.
This section presents some substantive difficulties. First, the petitioners seek to repeal at
least two of these exemptions in other portions of the initiative; repealing sections twice is
redundant. Second, several of the exemptions pertain to matters involved in interstate
commerce (i.e., railroad rolling stock, large motor vehicles, sales to out-of-state
contractors). By repealing tax exemptions related to interstate commerce (or, said in the
reverse, by allowing for a state tax on interstate commerce), the initiative may run afoul of
the federal constitutional prohibition against excessively burdening interstate commerce.
Additionally, Sections 24 and 25 present a challenge from a drafting standpoint.
These sections contain no actual statutory language to be adopted; there is neither new law
to be implemented, nor existing law to be amended. Rather, these sections are merely
statements of intent regarding sales tax exemptions. It is axiomatic that an initiative
contains law. See Idaho Code § 34-1804 (which indicates that referenda refer to acts of the
legislature, and initiatives pertain to proposed laws). The petitioners may want to revisit
these sections and propose specific statutory language to be implemented.
Finally, the proposed statutes appear to raise revenue for the State of Idaho. 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 Ill 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. Ill, 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

Secretary of State Denney
June 10, 2015
Page 6 of 6
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 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 .
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 Certification of Review, deposited in the
U.S. Mail to Betsy McBride, League of Women Voters of Idaho, 12923 N. Schicks Ridge
Rd ., Boise, Idaho 83714.

Analysis by:

David B. Young
Deputy Attorney General