As our economy changes from goods to a service based economy tax structures will eventually adapt to this change. Here's an ITEP policy brief about sales tax base expansion and applying the sales tax to services. This concept was also highlighted in this editorial in the Roanoke Times.
Most economists generally agree that a policy to expand the sales tax base should try to limit the amount of business inputs that could potentially be taxed. Inputs are items or products that businesses use in production of their goods or services.
Here are some reasons why many economists offer a word of caution about taxing business inputs:
1) Putting a sales tax on business inputs can mean that by the time a product gets to the buyer, several layers of tax have been added to the price - this multi-layering of tax liability doesn't really happen with other taxes (property or income). Having multiple layers of tax will certainly cause shifts in consumer behavior. For example, if specific services/products that company X uses to create a product are taxed, but company B can create that same product without having to buy products that are taxable the price could vary greatly between the costs of those two products.
2) If certain states tax business inputs and others don't this could potentially (and probably would) distort the choices that businesses make when deciding where to locate.
3) Taxing business inputs could cause changes in how companies operate internally and thus impact their ability to compete (again, these changes are less likely to happen with other types of taxes). For example, if a state decided to tax accounting services - a larger, perhaps older company could figure out a way to include accounting services "in house" and avoid paying a sales tax, whereas a smaller company won't have this flexibility and will need to pay a sales tax on those services. So taxing business inputs could really put some companies at a larger disadvantage compared to others.
Expanding the sales tax base to include services is certainly an important step for policy makers who are interested in modernizing a state's tax structure. However, it's important to also carefully consider the impact this expansion could have on business and consumers.