California Sales Tax Base

The California sales tax begain in 1933 and applied to tangible personal property, with some exceptions. It was a Depression-era tax to help preserve government revenues. It was before we had digital downloads, lots of types of entertainment and personal services, such as personal trainers, tanning and tatoo saloons, etc.

In the past few decades, consumption of intangibles and services has increased while consumption of tangible personal property have decreased. This has eroded the California sales tax base. The Legislative Analyst’s Office (LAO) noted that in 1981, 48% of consumption represented items subject to the California sales tax, but that amount dropped to 38% by 2005. In April 2008, Apple announced that iTunes had become the largest music retailer in the US. In 2007, eMarketer estimates that individuals in the US spent $1.1 billion for music to be listened to on their mobile phones. The research firm estimates that this amount will be $2.8 billion in 2011 (3/28/08 Business Journal article). This digital music is treated as intangible in California and is therefore not part of the sales tax base (other states may treat it as the equivalent of tangible personal property or have expressly stated that it is taxable).

Also, access to broadband that enables larger files to be downloaded is skewed in favor of higher income households. Thus, it is likely that higher income individuals are purchasing digitizable goods in that non-taxable form rather than the taxable tangible form that lower income individuals may be using. This makes the sales tax even more regressive. A 2004 press release by Nielsen//NetRatings was entitled, “Affluent Americans Power Internet Growth.” The report noted that at the income level of $150,000 or more, 69% of Internet users used broadband while 31% used narrowband. In contrast, in households with income under $25,000, broadband use was 25% which narrowband use was 75%.

In recent years, some other states have expanded their sales tax, such as New Jersey, that now taxes more types of personal services as well as digital property.

Should California broaden its sales tax base to include the digital equivalent of items that would be taxed if in tangible form? Your professor advocates modernizing the tax base and lowering the tax rate, as well as broadening it to include items more likely to be purchased by consumers rather than businesses so as to not make the pyramding in the sales tax base any worse. What do you think and why?