Taxing Food - Good or Bad Idea?

This past week New Mexico Governor Bill Richardson vetoed legislation that would have imposed sales tax on food (Durango Herald News, 3/25/10). His rationale was the burden such a tax places on low and middle-class taxpayers. Per his March 24 press release:

"“I am not willing to put this burden on working families in the form of an unfair tax on food. I agree with those who call this a cruel tax,” Governor Richardson said. “It is especially cruel during the worst financial crisis New Mexico has ever experienced."

The legislature had proposed reinstatement of the food tax to help cover budget deficits. Per the Durango Herald, other tax increases were enacted.

Is a sales tax on food a bad idea? Is a food exemption needed to help low and middle-income taxpayers?

No! The reality is that higher income taxpayers spend more on food so they get the bulk of the tax relief. Also, many states tax some kinds of food such as snacks or soda or take-out food. Tax laws become complicated in crafting narrow exceptions to rules. It would be better from an equity and simplicity standpoint to tax food AND provide a refundable income tax credit to low-income individuals. Or perhaps a sliding scale credit.

Some data from the US Census Bureau for 2008 indicates the following spending patterns for consumers with income before taxes below $70,000 and at $150,000 or higher:

Income below taxes less than $70,000:
Food at home $3,033
Food away from home $1,784


Income of $150,000 and higher:
Food at home $5,940
Food away from home $7,071

So, assuming a sales tax rate of 5%, a consumer with under $70,000 of income saves about $152 annually by exempting food at home. In contrast, a consumer earning $150,000 or more before taxes saves almost $300 per year. It would be better to tax the food and give the low income taxpayer a $150 refundable income tax credit. If a state also exempts food away from home, the tax break for high income taxpayers is even bigger.

Drawbacks? Yes, there are some. the big one is that a sales tax exemption is immediate while the income tax refund for a low income taxpayer won't come until they file their income tax return. If the low-income taxpayer is already receiving some type of payments from the state, it is possible that the tax credit could be distributed more regularly through that system.

Another alternative, lower the overall tax rate and broaden the base. That reduces the cost of other items purchased by low-income consumers while capturing more of the consumption of high income taxpayers. New Mexico already has a broad-based sales tax though.

But, bottom line - elected state officials should stop giving big tax breaks to high income taxpayers with the excuse that they are helping low-income taxpayers. There are other ways to help low-income taxpayers.

For more information - click here.

What do you think?

COST Rates California Tax Administration a D-

The Council on State Taxation (COST) released its 2010 report - The Best and Worst of State Tax Administration: COST Scorecard on Tax Appeals & Procedural Requirements in February 2010. The factors COST uses to evaluate state tax administration systems include:

• Is there an independent tax tribunal with judges trained and experienced with the tax law.
• Do taxpayers have to pay first to get a hearing?
• Are the statute of limitations periods and interest rates the same for both assessments and refund claims?
• Is the protest period that arises upon issuance of an assessment at least 60 days (ideally 90 days)?
• Is the state return due date at least 30 days later than federal return due dates?
• Is the law clear as to what is considered a "final determination" by the IRS that would then trigger the taxpayer's obligation to report tax return changes to the state? COST recommends that taxpayers have at least 6 months to correct the state returns after a final determination by the IRS as to federal changes.

California received the lowest score of D- from COST. Reasons for this include (see page 9 of the report):

• Having an elected tribunal that is not required to have any tax expertise.
• Taxpayers must pay first to have a case reviewed at Superior Court.
• The interest rate that applies to underpayments and overpayments is not the same.

Tax reform discussions typically focus on just the base and the rate structure. However, if should also include reform of tax administrative practices to improve ones that are inefficient, do not make good use of technology, are out of sync with federal income tax procedures, are unfair or too burdensome.

One reform that has been suggested multiple times including by the last two tax commissions in California is to have an independent tax forum, such as a tax court, to resolve disputes between the state tax agencies and taxpayers. See:

• Commission on the 21st Century Economy (9/09) report at pages 46 and A-19 to A-20
• California Commission on Tax Policy in the New Economy (12/03) report at pages 4, 33 to 37, 77 to 83

I expect to have more on this later. What do you think are appropriate changes to improve California's tax administration system?

Data-Driven Corporate Tax Reform Perspectives

Consideration of effective tax rates, taxpayer demographics (such as asset and revenue size and type of entity), tax expenditures, audit rates and more, is useful to better understand our existing tax systems. This data is also useful in understanding tax reform efforts. For example, given that the bulk of business entities do not operate as C corporations, should corporate tax reform be scrapped and business tax reform be the focal point instead?

I've got a short article in today's AICPA Corporate Taxation Insider on a data-driven perspective on tax reform. It is a start as there is a lot more data that can be analyzed. Also useful to consider in tax reform are trends shaping the economy and society. For example, the growth of e-commerce, more mobile employees and growth in self-employed entrepreneurs. I've posted on that before - here. After all, a revised tax system should reflect how we live and work today rather than how we did so in the past.

SB 71 - Sales Tax Exemption for Clean Manufacturing Equipment

Today (3/24/10), Governor Schwarzenegger signed SB 71 to enable a mechanism for manufacturers to obtain a sales tax exemption for the purchase of green manufacturing equipment.

The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) was created in 1980 (California Chapter 908 (1980), Public Resources Code §§26000-26037.). The CAEATFA was designed to provide methods for financing technologies that promote development of renewable energy sources or that conserve scarce energy resources. In 1994, “advanced transportation” was added to the title to promote development and commercialization of new transportation technologies. SB 71 further expands this funding source to include clean-tech manufacturers. Such funding expires after 12/31/20. The Legislative Analyst's Office is to issue a report on the "effectiveness of the program on or before January 1, 2019, evaluating factors including but not limited to: the number of jobs created in
California; the number of businesses retained in or relocated to California; the amount of state and local revenue and economic activity generated" (Assembly Analysis 3/22/10).

In 2008, CAEATFA was in the news because it was used to enable a sales tax exemption for manufacturing equipment purchased by Tesla Motors (see Nellen, "Incentives Spur ZEV Manufacturing," Journal of Multistate Taxation and Incentives, Nov/Dec 2008).

The process to get the exemption is more complicated than just telling the equipment vendor that you are eligible for an exemption. The purchaser must apply for the exemption with the CAEATFA and additional paperwork is also required (see CAEATFA website for details).

Is SB 71 good tax policy? Mostly.

• Equity: Why is the exemption only available to certain manufacturers rather than to all manufacturers? The reason is that the state is trying to build a clean-tech industry which it hopes will create jobs and improve the economy.
• Simplicity and Economy in Collection: The CAEATFA exemption approach is more complicated than just asking a seller for the exemption. Much more paperwork and time is required.
• Economic Growth & Efficiency: Given the emphasis on reducing greenhouse gas emissions and improving the environment, by both businesses and households, it seems wise for California to do whatever it can to ensure that this industry takes a strong hold in California. Otherwise, the California economy will continue to suffer and have difficulty rebuilding. To avoid pyramiding of the sales tax, all businesses should have a sales tax exemption on their purchases. SB 71 does not go far enough (but that is because SB 71 is focused more on clean tech than improving the tax law).
• Minimum tax gap: Given the CAEATFA approval process, it is extremely unlikely that the exemption will go to an unqualified taxpayer.
• Transparency and accountability: The application process results in the state knowing up front (before any exemption is approved), what the cost will be. That is a more accountable approach than just giving an exemption to be given by sellers. It also allows the state to control the "cost" of the exemption. The legislation also calls for a report by the LAO and the provision sunsets in ten years to allow an opportunity to be sure it is meeting its goals without becoming a permanent provision in the law.

Health Care Proposal for Broader Base and Higher Rate for Medicare Tax

The White House's health care plan includes a revenue provision to apply the Medicare (HI) tax of 2.9% (1.45% for each of employers and employees) to more than just wages and self-employment income. The HI tax for high income employees and self-employed would also be increased (but not the employer rate). Here is the White House explanation:

"Broadened Medicare Hospital Insurance (HI) Tax Base for High-Income Taxpayers Under current law, workers who earn a salary pay a flat tax of 1.45 percent of their wages to support the Medicare Hospital Insurance (HI) trust fund, but those who have substantial unearned income do not, raising issues of fairness. The Act will include an additional 0.9 percentage point Hospital Insurance tax for households with incomes exceeding $200,000 for singles and $250,000 for married couples filing jointly. In addition, it would add a 2.9 percent tax for such high-income households to unearned income including interest, dividends, annuities, royalties and rents (excluding income from active participation in S corporations)."

There are also other revenue proposals in the plan including codifying the economic substance doctrine and an excise tax on insurance companies on high costs health plans (starting in 2018).

But back to the Medicare tax broadening - is that a good idea? Well, something needs to happen with Medicare because it is facing shortfalls. The Social Security Administration in its annual actuarial reports notes this (see 2009 report here). Many young people joke about there not being any Social Security for them when they retire. While there are funding problems with Social Security, there are earlier and more severe ones with Medicare. Per the 2009 actuarial report, "Medicare's financial difficulties come sooner—and are much more severe—than those confronting Social Security." The report further notes:

"The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is now 3.88 percent of taxable payroll, up from 3.54 percent projected in last year's report. The fund again fails our test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years—by 2012. The fund also continues to fail our long range test of close actuarial balance by a wide margin. The projected date of HI Trust Fund exhaustion is 2017, two years earlier than in last year's report, when dedicated revenues would be sufficient to pay 81 percent of HI costs. Projected HI dedicated revenues fall short of outlays by rapidly increasing margins in all future years. The Medicare Report shows that the HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax (from a rate of 2.9 percent to 6.78 percent), or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon."

An almost 7% rate for HI tax (3.5% each for employee and employer and 7% for self-employed) is steep on top of Social Security taxes of 6.2% for employer and employee and 12.4% for self-employed and income taxes! Perhaps the White House proposal to also have high income individuals with unearned income contribute to Medicare will help (and some of these individuals will get Medicare benefits without paying the tax on earnings).

It would be nice to see the figures on whether the proposed increase and expansion for the HI tax addresses the funding problem AND what cost savings will be put in place to also address the problem and keep it from continuing to worsen.

So, a change in the HI revenue model is certainly needed, but we should also see cost savings proposals too. The White House HI proposal does make the tax more equitable in bringing some progressivity to it and having it apply to not only wages, but to unearned income (of high income individuals). I don't know why it was just a payroll tax unless the model of many years ago showed that such a tax would be sufficient.

Transparency is a problem in that most workers probably could not tell you what percent of their wages is used to pay the HI tax and I'd guess that many workers don't even know about the tax. With the broadened base, we should ask why not just increase the income tax rates. I think that is the transparency dodge - the rate increase will be less noticed as an HI tax than a higher income tax rate.

What do you think?

Internet Usage or Bit Tax?

Ideas for how to use old and new taxes can come up in a variety of contexts and situations. Certainly if you look at the hundreds of tax bills introduced in any session of Congress, you'll get the sense that the tax law can be used to solve all problems!

Recently there were reports that Microsoft's security officer offered that one possible way to fund computer security measures was to impose a tax on Internet usage. For one report on this - see McMillan, "Microsoft's Charney Suggests 'Net Tax to Clean Computers," PC World, 3/2/10.

I don't think I've heard of such a tax for years. I recall in the late 1990s, there was some discussion of a bit tax. In July 1999, the United Nations issued Human Development Report 1999. This report provided background to and solutions for dealing with various gaps that exist throughout the world, such as technology, wealth, and education. One solution offered for narrowing the technology gap was to create new funding mechanisms, such as a bit tax or a patent tax. These types of taxes would raise funds from people with the technology and could be used to help provide the benefits to a broader group. A press release about the report noted that a tax of 1 cent on every 100 e-mails would generate over $70 billion per year. A subsequent statement from the U.N. noted that the "bit tax" example is an illustration and that the UN has no power to tax.

S.Con.Res. 52 (106th Congress) proposed a sense of Congress opposition to a bit tax on Internet data mentioned by the U.N. It noted that Americans would be disproportionately affected by a global Internet tax. Also see H.Con. Res. 172 (106th Congress).

Is a bit tax or Internet usage tax a good idea? No. While it might sound like a user pays tax - making those who use the Internet and might be most concerned with hacking, viruses and other bad computing actions, it has several flaws. First, security issues are not limited to use of the Internet, but could appear on software purchased on tangible media.

But bigger problems are with the principles of simplicity, convenience of payment, equity, neutrality, and economic growth and efficiency:

• Simplicity - How would this be assessed? What would be the tax base? Who would collect it? How would it be enforced?
• Convenience of payment - These types of taxes would need to be assessed as you are incurring the tax. That is, as you are using the Internet. But that isn't how things work. If it were added as a percentage of your monthly Internet access bill, you'd know about it when you sign up, but if taxed on how much you used the Internet rather than how much your access fees are, you'd need a usage meter on your computer (or iPhone, etc.) to help you know just how much tax you're ringing up so you'd know if you can afford to keep surfing.
• Equity - A bit tax or Internet usage tax would be regressive as it would not be tied to one's income. Thus, if a low income and high income person each have the same amount of tax, it would represent a larger percentage of the low-income taxpayer's income relative to the higher income taxpayer's income.
• Neutrality - An Internet usage tax could affect a person's decision on whether or not to use the Internet. Taxes should not play a role in decision-making.
• Economic growth and efficiency - Businesses, individuals and governments rely more and more on the Internet for operations and information transfer. If the costs go up, it increases them for everyone and might lead to reduced use of the Internet for activities that would provide benefits to many.

I doubt the suggestion of an Internet usage tax is going anywhere. Perhaps though the comment will make people think of the high costs of Internet security and come up with alternatives for addressing the problem.

Soda Taxes and Tax Policy

The idea of taxing sodas, usually ones with sugar and sometimes other sugary drinks, is back in the news. NY Governor Patterson has again proposed a tax of one cent per ounce on sugar sodas. He says this 12 cents per can can bring in $1 billion to help pay for schools and health care (NY Governor Defends Soda Tax, Reuters). Proponents note the concerns of obesity and diabetes and other problems of unhealthy foods. Opponents say such taxes don't work and might result in a loss of jobs.

There is also an article in The Vancouver Sun ("'Soda tax' movement gains steam," 3/11/10). This article notes that Canada is not discussing soda taxes, but is instead pursuing school nutrition policies to address obesity concerns.

How does a soda tax stack up under some principles of good tax policy?

• Equity & fairness - a soda tax is a regressive consumption tax. It will represent a higher percentage of the income of a low-income taxpayer relative to a high income taxpayer. While single out one unhealthy product when there are so many?
• Economy in collection - if there were already some reporting or collection for sale of soda, perhaps the tax could be tacked on. For example, many jurisdictions collection a deposit on bottles, but there would certainly be added costs because the soda tax would likely not apply to the same items for which a deposit is collected. New tax forms and enforcement mechanisms would be needed.
• Convenience of payment - since the soda tax would be added on at time of purchase, the person would know of it and that it could be avoided by not making that particular purchase.
• Simplicity - a tax on sugary beverages would likely be complex in that there would be need of a definition of what is taxed. For example, would flavored water be subject to tax? Would all diet drinks be exempt? How do fast food restaurants comply if customers can get their own beverage?
• Neutrality - would the tax affect a person's buying decisions? Probably and that is what proponents are hoping for - that consumption will go down, but not enough that no money is raised.
• Economic growth and efficiency - soda manufacturers and distributors are some of the biggest companies around. What happens if some customers decided to drink water instead (if it is bottled water, perhaps that is ok as some of these companies likely also distribute bottled water). Some people may switch from sugar to diet sodas. Certainly, it is possible that there could be some job loss, but it seems likely that it would be deployed elsewhere or the companies would come up with new products that are not taxed.
• Minimum tax gap - this is a tough one at the local and state level as people living near the border can easily go to a neighboring state to get the item to avoid the tax.
• Alternatives - the state could review its spending to see where it might be encouraging unhealthy behavior, such as in low-quality school lunches and K-12 that offers little or no physical activity. Why not pursue public education campaigns to better inform citizens of healthy and unhealthy food choices. California requires restaurants to post calorie and related information (LA Times, 9/30/08). Such information can lead to better food selection choices. Also, finding ways to encourage people to exercise more should be explored.

Principles of good tax policy indicate that a soda tax has problems. Alternatives to address both revenue and health concerns should be explored.

Addressing Abuse and Errors - Documenting the First-Time Homebuyer Credit

The government has uncovered a fair amount of abuse with taxpayers erroneously claiming the $7,500 or $8,000 first-time homebuyer credit. Some of these taxpayers didn't own a home or hadn't purchased one, among other errors. (See my 2/27/10 post - Amazing Disrespect for the Tax System and Fellow Taxpayers.)

When the credit was last extended in November 2009, Congress addressed these problems with some changes including requiring that the settlement statement be attached to the return. I've got a short article in the AICPA Tax Insider on the credit and current reporting requirements - here.

Certainly there is also a good policy question here too - was this a good measure or does it just further cause the tax law to distort investment decisions to encourage investment in housing over all other types of investments and bringing the effective tax rate on housing to about zero? I'll save that topic for another day.

The article has links to the law changes and helpful information on the IRS website. Certainly, any eligible taxpayer seeking a nice gift from the government (that is, from other taxpayers) for the purchase of a new home, should take a look at this now as it expires soon.

Sales tax exemption complexity

I find it amusing to read explanations of sales tax exemptions in the California Board of Equalization monthly newsletter. The March 2010 newsletter includes a short article reminding readers that "toasted sandwiches are taxable."

Generally, food purchased at the grocery store is non-taxable. The rationale for this exemption is that food is a necessity of life. But, food prepared for on-site consumption, such as at a restaurant, is subject to sales tax. At a grocery store (and other places), issues can arise because you might pick up a prepared sandwich to eat at the tables that some stores have in their deli section or you might be taking it home to eat later, just like the small carton of yogurt you also purchased. But, if the food is given to you at a particular temperature, it is assumed it is for consumption right then and is probably taxable.

The article reminds readers:

"A food product is considered a hot food product if it is heated to a temperature above room temperature (for example, grilling or toasting a sandwich, dipping a sandwich in hot gravy, or using infrared lights, steam tables, or microwave ovens)."

But, we can't judge taxability by temperature alone because, of course, there are exceptions and special rules. For example, the article also notes:

"Sales of hot bakery goods are not taxable when sold to go, unless they are sold as part of a combination package. For example, a combination of hot coffee and a doughnut for a single price is taxable because the combination package includes a hot food or hot beverage."

This is all a reminder that when items are carved out of the tax base, such as food not being subject to sales tax, special definitions are needed, such as to define "food." Also, lawmakers have a tendency to say, "well, we don't want to exempt the whole large category of items" and they write exceptions. This all helps keep tax practitioners employed, but is bad tax policy.

It would be simplest to tax all consumption by individual consumers and provide relief, such as for necessities of life and the regressive nature of the sales tax, via a refundable income tax credit. This makes the law simpler AND more equitable. While food is a necessity of life, higher income individuals buy more of it and at higher prices so the relief is skewed to provide greater tax savings to taxpayers who don't need the relief. For more - click here.

If you read my post of March 8, you might think I'm being inconsistent in my perspective on the value and need for exemptions. In that post (here), I noted that California should create a sales tax exemption for manufacturing and R&D equipment purchased by businesses. But that is due to a different reason. A sales tax should only tax final consumption by consumers; businesses should be exempt. This easily happens with a credit invoice VAT, but no state does it completely for the sales tax. There is no complexity with the sales tax exemption for all business purchases because we know what a business is and they are registered as such with various state agencies. When a business makes a purchase, no sales tax is charged. If the buyer is not a business, sales tax is charged.

Manufacturing and R&D Equipment Sales Tax Exemption Proposal in CA - AB 1719

California is one of the few states that requires businesses to pay sales tax on manufacturing and R&D equipment they buy and use in the state. This makes California a very expensive state for manufacturer and companies engaged in R&D work to operate in, particularly when the sales tax rate is close to 10% in some California counties. This extra cost alone can be reason enough for companies not to locate manufacturing and R&D operations in California. It is not a business-friendly situation.

AB 1719 was introduced and amended in February 2010 to provide a state level sales tax exemption for tangible personal property used "primarily in any stage of manufacturing, processing, refining, fabricating, or recycling of property; in research and development; to maintain, repair, measure, or test specified property." The local portion of the sales tax would still be assessed.

A significant tax law improvement of AB 1719 is that it eliminates (or greatly reduces) pyramiding. When a business pays tax, that tax is likely to get built into the price charged to customers (and some ends up getting paid by employees and shareholders (indirectly)). Assuming the customer is charged tax on the sale, the end result is that a tax is charged on a tax - pyramiding. The best way to avoid pyramiding is to only have the final consumer pay sales tax, not businesses.

AB 1719 is a good idea. The problem though is that California has a big budget shortfall. Of course, since there is likely relatively little manufacturing equipment being purchased today, perhaps the revenue hit of exempting new purchases isn't too bad. It would be interesting to see the revenue estimate. The upside is that it could hopefully encourage businesses to expand in California rather than going to other states that don't impose sales tax on equipment purchases. This would generate income taxes from more workers (and higher paid ones that work with this type of equipment).

The public likely won't like this bill - a tax "giveaway" to businesses. But lawmakers should help get the word out that ultimately, businesses do not pay taxes because they are all passed on to workers, customers and investors. Another approach would be to phase-in the change to spread the revenue loss out over a few years, perhaps tied to job increases in the sectors that are eligible for the sales tax exemption.

But, there are also other needs for any sales tax dollars that state thinks it doesn't need. The CA sales tax rate is too high - it is the highest among the states. As I've discussed here numerous times, lawmakers need to broaden the base to include digital goods purchased by individuals, personal services and entertainment and then LOWER the rate. This will make the tax much more fair and neutral.

For more - click here.

Tax Oddities - Sales Tax Holidays

Several states have sales tax holidays where for some period of time - perhaps a weekend or a full week, there is no sales tax owed on particular items. For example, there might be a one week sales tax holiday on children's clothing or school supplies before school begins in the fall.

The Federation of Tax Administrators (FTA) has a list of most of these holidays. California has no sales tax holidays which is a good thing. [Well, that really isn't true because there are some goods that should have sales tax applied, such as digital goods purchased by individual consumers, entertainment and personal services, that enjoy a year round sales tax holiday.]

There is a news story today that caught my eye because it is just odd - the West Virginia House of Delegates passed a bill (HB 4521) calling for a sales tax holiday on guns purchased during the first weekend in October. The story from The State Journal ("Delegates approve gun sales tax holiday," 3/4/10) notes that the state might make up the lost revenue from the increased sale of ammunition and other items sold by gun stores!

The article and FTA list note that a few states already have a gun sales tax holiday.

Observations:

1. This is just odd - why single out guns and exempt them from tax for two days?
2. Isolated and short-term exemptions are poorly targeted to provide relief to taxpayers who need it. Even a very wealthy person who can easily afford to pay sales tax on his/her gun purchase gets the exemption.
3. It is complicated for vendors to deal with due to extra recordkeeping.
4. A tax break for one group of taxpayers means that others will pay more, assuming revenue neutrality.
5. Where will it stop? Other groups will step forward seeking a holiday for items purchased by their members.
6. Vendors of goods subject to the sales tax holiday surely enjoy high sales during the holiday. What happens to them for the rest of the year?

The Tax Foundation has a great report explaining sales tax holidays "as politically expedient, but poor tax policy" (8/09) - here.

Colorado and Taxing Software - California should do almost the same

On February 24, 2010, Colorado enacted HB 1192 which changes the way sales tax applies to software. Prior to this bill, Special Regulation 7 provided that software transferred electronically or provided by a service provider or obtained via "load and leave" is not subject to sales tax. A similar approach applies in California (Reg 1502) under the assumption that an electronic transfer is not tangible personal property.

HB 1192 repeals Special Regulation 7 effective March 1, 2010. HB 1192 clarifies that it "is not intended to alter, other than the designation of standardized software as tangible personal property, the tax treatment of what is known in the industry as "digital goods", "application service providers", "software as a service", or "cloud computing". Nothing contained in said House Bill 10-1192, including the repeal of Special Regulation 7 or the requirement that tax be apportioned in the case of a business purchase of software for its own users operating both within and outside of the state, shall be read as expressing the general assembly's intent regarding the treatment of such methods of transacting business."

I think California lawmakers should consider a similar change in California. Our current system of only applying sales tax to software obtained on tangible media violates equity and neutrality principles. For example, the tax rules do affect how you'll want to acquire software if one technique is taxable (buy the CD version) and one is not (digital download). Yet, the end result is the same - you have use of the software.

Taxing the electronic download does raise some issues though. When a customer does a digital download and pays with a credit card, the seller has no idea where the person is located UNLESS they ask and the person gives the correct answer. It is not problem to ask - that can be down on the payment webscreen. The legislation should provide that the vendor can rely on the answer given by the customer without liability. If the customer gives wrong information - they should be the ones penalized.

Another modification California should consider is to say that only software obtained by a final consumer (not a business) is subject to sales tax. California needs to start moving its sales tax to only apply to final consumption, not consumption by businesses.

California should go beyond software and tax all digital goods unless purchased by a business. With the provision that the seller may reasonably rely on information from the purchaser as to their location.

Looking for more information - click here.