Pennsylvania House Bill 109, which was introduced by Representatives from Delaware, York, and Philadelphia counties, would impose a 10% tax (the “Video Game Tax”) on each retail sale of a video game with a “mature” or “adults only” rating, as determined by the Entertainment Software Rating Board (“ESRB”). The bill was referred to the House Committee on Finance. An identical bill (House Bill 2705) was introduced toward the end of the last legislative session.
The ESRB was established in 1994 as a response to public criticism over the increasingly graphic content of video games. The ESRB assigns ratings to video games available to consumers based on the content of the games, similar to the rating system used for motion pictures. The ESRB rating system applies to games purchased from a physical store location and games that are directly downloaded to a game system, PC, or mobile device. The ESRB’s “mature” rating is used when it is determined that the content of the game is suitable only for an individual 17 years of age and older. The “adults only” rating is used when it is determined that the content is suitable only for individuals 18 years of age or older.
The Video Game Tax would be imposed and collected in a manner similar to Pennsylvania’s sales tax, but would be imposed in addition to the sales tax. For example, if a consumer purchased a game with a “mature” rating from a Harrisburg retailer for $60, the consumer would be obligated to pay the 6% sales tax ($3.60), plus the 10% Video Game Tax ($6.00). Thus, the consumer’s out-of-pocket cost for the game would be $69.60. Like the sales tax, the retailer would be responsible for collecting and remitting the Video Game Tax to the Department of Revenue. Under the proposed bill, all money collected from the Video Game Tax would be deposited into a special fund, earmarked for enhancing school safety measures.
The debate over the content of video games has raged on for years, with ebbs and flows over time. The Video Game Tax, if passed, could become the next battleground over the intersection of state taxation and the First Amendment. In Brown v. Entertainment Merchants Association, the U.S. Supreme Court held that video games, like other forms of media, are protected speech under the First Amendment. As a consequence, it seems likely that the Video Game Tax, if passed, could become the next battleground over the intersection of state taxation and the First Amendment.1 The U.S. Supreme Court has also held that the First Amendment prohibits taxing schemes that rely on content-based distinctions between otherwise similar forms of media. Thus, a state cannot impose its sales tax on some magazines, and not others, based on content.2 The Video Game Tax would appear to create a taxing scheme that discriminates between different types of media content. The Entertainment Software Association already issued a statement this week, stating that the bill is unconstitutional as drafted because it violates the First Amendment protections afforded to video games by the Supreme Court in Brown.
In addition, to any First Amendment challenge, the Video Game Tax, if enacted, will also be subject to challenge under the Pennsylvania Constitution. The tax would present an impermissible delegation of the authority of the Pennsylvania Legislature, because it imposes a tax based on ratings standards set by an outside group, the ESRB. The Pennsylvania Commonwealth Court recently declared certain portions of Act 43 of 2017 unconstitutional because it contained fireworks regulations that cross-referenced a policy used by the National Fire Protection Association, including “any subsequent edition” of the policy.3 The court held that this resulted in a statutory scheme that allowed the trade association to unilaterally change its policy and effectively change the legislation governing Pennsylvania’s fireworks industry. Thus, the court found that this violated Article II, Section 1 of Pennsylvania’s Constitution, which, vests all legislative power in the General Assembly.
Though it is a long way from passage, this bill will be one to watch moving forward, whether you’re a video game manufacturer, app provider, retailer, or video game consumer. For regular updates on the bill, check with the authors of this alert or the Reed Smith attorney with whom you usually work.
- See Brown v. Entertainment Merchants Association, 564 U.S. 786 (2011).
- See Arkansas Writer’s Project, Inc. v. Ragland, 481 U.S. 221 (1987).
- Phantom Fireworks Showrooms, LLC v. Wolf, – A.3d –; 2018 WL 6314015 (Pa. Commw. Ct. 2018). Any statute that adopts rolling conformity to the most recent policy of an outside agency presents a similar constitutional problem. For example, the Pennsylvania corporate net income tax statutes relies on an impermissible delegation of legislative authority by adopting rolling conformity to the Internal Revenue Code as amended.
Client Alert 2019-036
