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Need Revenue? Why Not Broaden Sales Tax?

  • Jul 10, 2013 | Gail Cole

 CBPP: tax both the physical book and the virtual book.

A recent article released by the Center on Budget and Policy Priorities (CBPP), an independent policy think tank, argues that states need to modify their sales tax policies in order to raise "adequate revenue in a 21st century economy." The solution? Close sales tax loopholes and broaden sales tax.

According to the CBPP, states will simply not be able to adequately fund education, transportation, and numerous other public services unless they "modernize their sales taxes." The article notes that sales tax accounts for almost a third of the tax revenue collected by states.

What to do?

CBPP suggests the following:

1. Broaden sales tax to include more services.

2. Tax sales of internet downloads such as music, movies, and computer software.

3. Enact "Amazon laws" and collect tax revenue from online sales.

4. Close the loophole that enables online travel companies to pay fewer sales taxes.

Tax more services

Expanding sales tax to more services has been considered and is being considered by several states. Massachusetts is on track to tax numerous computer services. Lawmakers in North Carolina have proposed lowering the rate of sales tax and expanding it to many services. As of June 30, Minnesota is taxing a number of services; and after a lengthy debate, Vermont  lawmakers have decided to tax cloud computing services. The list goes on and on.

Tax internet downloads

It's getting harder and harder to find video, music and book stores, but it's increasingly easy to download movies, music and books from the internet. If a DVD, CD or book would be taxed when purchased at a store, why shouldn't it be taxed when downloaded? Tennessee has taxed movies, music and digital books since 2009.

Tax internet sales

Numerous states have already enacted so-called Amazon tax laws that require certain remote retailers to collect and remit sales tax. Internet retailers Amazon and Overstock have reacted: Overstock cut off ties with affiliates in New York, and Amazon did the same in Minnesota. States have been sued for enacting such laws; in some cases the states (e.g. New York) have won.

The Marketplace Fairness Act of 2013, currently being considered by federal lawmakers, would grant states the right to require certain remote sellers to collect sales tax on their behalf, provided states enact simplification measures. If it makes it to law, more and more states will undoubtedly take advantage of it.

Tax online travel companies

Rare is the person who hasn't reserved a hotel room through an online travel agency such as Hotels.com or Expedia. Yet the CBPP reports that 42 out of 50 states "have failed to close a loophole that allows online travel companies…to collect taxes on only part of the sales taxes due on hotel room bookings." Taxing the wholesale price rather than the retail price reportedly costs states and localities somewhere between $275 and $400 million annually. The District of Columbia now requires online travel companies to pay sales tax on retail prices.

Broaden sales tax, lower rates

If states broaden sales tax to include numerous services, they may be able to lower sales tax rates. This would be welcomed by many. CBPP notes that the "median state sales tax rate is almost twice as high now as it was in 1970."

Look before jumping

The CBPP article argues that state budgets should not rely too heavily on sales tax revenue. Rather, sales tax should be part of a "diversified portfolio" that includes other sources of revenue, like income tax and property tax.

How do you manage sales tax?

photo credit: Pen Waggener via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.