Earlier this month, Apple announced that it had surpassed Wal-Mart as the largest music retailer in the United States, citing data from market research firm NPD for the first two months of 2008. The announcement will hopefully help to draw more attention to a long-standing shortcoming in some states' tax systems -- namely, their inability to tax electronic commerce properly. Simply put, the form a transaction takes should not affect the amount of tax it might incur. Someone who downloads the latest Mariah Carey album from iTunes should pay the same state sales tax as someone who purchases the CD at his or her local record store, and a hotel reservation made through Orbitz should result in the same amount of revenue to the state as one made over the phone or in person.
Yet, flaws in state tax laws mean that purchases of intangible goods -- like a downloaded version of E=MC2 -- are often not subject to the same sales taxes levied on purchases of tangible goods. For example, California loses an estimated $500 million in sales tax revenue each year because it makes such a distinction between tangible and intangible goods. A proposal to move towards ending that distinction was defeated in the Assembly's Revenue and Taxation Committee this past week, the victim of lobbying by the American Electronics Association, Yahoo, Microsoft, and others.
Similarly, states and localities continue to lose vital tax dollars due to hotel reservations made via the Internet. That is, online travel companies like Hotels.com frequently avoid paying the correct amount of taxes by maintaining that they only owe tax based on the wholesale price they paid to the hotels for the room reservations they offer, rather than the retail price they charge their customers. Different jurisdictions have taken different approaches to this problem. A number of cities have brought lawsuits against hotel resellers, while the state of South Carolina recently served one such company with a bill for $6.3 million in unpaid sales taxes. On the other hand, Florida, predictably, has the worst idea. A bill before one House committee -- and backed by Expedia -- would let online travel companies keep this tax break, at a cost of $22 million in forgone revenue.