Expanding the Sales Tax Base

If states facing yawning deficits do need to enact broader-based revenue increases, another option is to extend the state sales tax to more services and to goods purchased over the Internet. 

Broadening the Sales Tax by Including Services: The current sales tax in most states is outdated, designed for an industrial economy where most consumer spending went to buying goods, rather than services which remain largely untaxed in most states. 

Services represent a broad range of industries that increasingly represent a much larger share of market activity including, medical, dental, automotive, telecommunications, home care, consulting engineer, dry cleaning, physical training, real estate, personal care, and residential utility services. As CBPP explains, expanding the sales tax to services, "makes state tax systems fairer, more stable, more economically neutral, and easier to administer."

Moreover, because state sales taxes are a major source of funding for schools, universities, health care, public safety, and other functions of state and local government, adding services to state sales tax bases can help states maintain their support for those functions, for instance during an economic downturn when state revenues are declining."  Expanding the sales tax base will also help states avert unfavorable tax increases down the road. CBPP estimates that broadening the sales tax base could yield a total of $87 billion nationwide.

In the past few years, lawmakers proposed or enacted sales taxation on certain services.

- Nebraska Sen. Cap Dierks introduced LB 1066, a measure to broaden the sales tax to services this January. Some of the services outlined in the bill include garment alterations, armored-car services, barber and beauty services, all farm-equipment repairs, financial institution, dating services, garbage collection and recycling services.
- In June 2009, Maine passed legislation to broaden its sales tax to amusement, entertainment, recreation, installation, repair, and personal property services.  The measure is estimated to generate $41 million in FY2010, representing 4.4 percent of projected sales tax revenue collections.
- New Jersey implemented an expansion of its sales tax to some services in 2006.

Implement the "Amazon tax": States lose billions every year due to the "inability to collect all sales taxes that are legally due on purchases made over the Internet." In 2008, New York became the first state to require online retailers to collect sales tax on purchases to customers in the state. The state changed its tax code to mandate that an out-of-state retailer with more than $10,000 a year in sales generated through sales affiliates in the state has nexus and must collect sales and local taxes. After the bill's passage, Amazon.com immediately sued, but lost the case. The state expects to generate $47 million from the "Amazon tax."  Rhode Island followed New York's lead and passed the Amazon tax last year. This year, New Mexico Rep. Eleanor Chavez sponsored HB 50 to extend the state's gross receipts tax to online sales.