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Bringing sales taxes into 21st century

By Kay Bell ·
Tuesday, July 23, 2013
Posted: 3 pm ET

I was a late adopter of musical downloads. I grew up with vinyl records and I truly enjoy albums (yes, I still call them that) in their entirety. But the time has come for a confession.

Hello. I'm Kay and I'm an iTunes junkie.

I rationalize my new addiction by noting that I'm saving a few dollars by spending just 99 cents on a song instead of $12 or $15 for a full CD.

And, as a tax geek, I must note that I'm still pulling my tax weight. I live in Texas, one of 22 states and the District of Columbia that taxes downloaded music, movies and books.

Costly sales tax oversight

The remaining states that do have sales taxes but aren't bothering to collect on digital transactions are missing out on a collective $300 million a year in taxes, according to the Center on Budget and Policy Priorities, or CBPP, a D.C.-based tax policy think tank.

In addition to the electronic entertainment offerings that are taxed by some states, CBPP says 33 state tax offices (and D.C. again) collect on downloaded computer software.

The most aggressive digital tax collectors, says CBPP, are Hawaii, New Mexico and South Dakota. Virtually all digital goods and services sold there are taxed the same way as most other types of products and services. Idaho, Utah and Washington also have very broad coverage of digital goods and services when it comes to taxes.

Some states, says CBPP, also tax more niche digital goods and services, such as online information databases and electronic greeting cards.

21st century sales tax codes

With the annual spate of sales tax holidays approaching, perhaps it's time to rethink sales taxes.

Instead of exempting items, CBPP says states need to look at revamping their sales tax laws to bring them into the 21st century and bring in more money to state treasuries.

In addition to collecting the $300 million in forgone digital taxes, CBPP says states should:

Enact an "Amazon tax." This would bring in the sales taxes that are legally due on online purchases but that retailers in many states aren't required to collect. That would bring more than $20 billion a year nationally.

Broaden tax bases to include more services. Household spending has been shifting from goods to services for decades, yet most states haven't updated their sales taxes to reflect this fact. The cost, says CBPP, is in the "tens of billions of dollars" each year.

Close the online hotel tax loophole. Forty-two 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. This costs states and localities roughly $275 million to $400 million each year.

The CBPP suggestions make a lot of sense, especially for states and cities struggling to bring in more money. And sales tax hikes are usually an easier sell to the citizenry than income taxes.

But I suspect that we'll get deeper in the 21st century before all states make the CBPP recommended changes to their sales tax laws.


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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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