Textbook sales tax exemptions

New York and a few other states allow a sales tax exemption for college textbooks.  That may be too broad of a statement - the exemption is for a college student buying a textbook noted on his/her course syllabus or a list from the college.  It is not simple for the buyer or seller due to definitions, restrictions and recordkeeping.  I've got more on this, originally posted at SalesTaxSupport.

Special tax rules tend to violate principles of good tax policy, such as simplicity, neutrality and equity. For example, a sales tax exemption for certain types of manufacturing equipment will require specific definitions of the eligible equipment. We have seen these types of issues litigated which is a good indicator of the complexity involved. Also, such an exemption benefits one industry over another.

The start of the school year brings attention to a few special education provisions in sales tax rules. I address one of these here - sales tax exemptions for college textbooks.

College textbooks are usually expensive.  As an undergrad many years ago in the California state university system, my books were always more than the cost of my tuition.  I see that my alma mater, CSU Northridge, currently tells students that books will cost almost $1,800 per year! In California, students pay sales tax on the textbooks, unless they buy an electronic book.

A few states, such as New York, offer a sales tax exemption on tangible textbooks. However, it might be "taxing" to the student (and the sellers) to get that exemption. In early August, the New York State Department of Taxation and Finance issued Tax Bulletin ST-126 (TB-ST-126; 8/7/14). Per this bulletin, "the student may have to complete Form ST-121.4, Textbook Exemption Certificate, and give it to the seller." Then over 600 words follow to explain how to get the exemption. The requirements to get the exemption include that the student must be full-time or part-time (that is odd as there is no other type of student) at "an institution of higher education,"  the book must be required for course work, and the student must show the seller a "valid student identification card or other evidence of enrollment at the time of purchase."

It's not easy for sellers either. They have to verify all of this and keep copies of the required book list from the instructor or university, or the "properly completed certificate" of exemption from the student.

There are penalties for misuse of the exemption.

So, is the textbook exemption worth it? Is this good tax policy? No. If the exemption is there to help reduce costs of going to college, there are much higher costs than sales tax where many college students could use assistance.  From an equity perspective, the exemption benefits all students, even those who can easily afford to pay the sales tax. A scholarship or grant to help students in need of financial aid would be more targeted. There would be more funds to help those with a financial need if the exemption did not exist. Also, the recordkeeping burden for the seller is too costly and not appropriate. If legislators want to reduce costs for college students, why not find a way that won't put the burden on third parties.

Information from the National Association of College Stores notes that a slight majority of states that impose sales tax have some type of textbook exemption, most of them with restrictions. The restrictions add to the complexity in that special definitions are needed. Also, sellers are at risk of making an error and being on the hook for the uncollected sales tax. Amazon only lists ten states that exempt textbooks from sales tax.

The NACS also notes there are proposals from some states for exemptions. I know California periodically has such a proposal (such as AB 479). [I've blogged on an earlier version from 2010.]

Another problem with the exemption beyond the complexity is that it sends a message that the state doesn't need the revenue. Yet, states do need the revenue. Also, it can lead to ideas for even more exemptions, such as on the computers and supplies purchased by college students.

Better to have a broader base and a lower rate. This better ensures that the sales tax can meet the principles of simplicity, neutrality, and equity.

While the exemption might sound like a great thing for students, and California often introduces proposals for such an exemption, it is not. There are better ways for legislatures to help college students including targeting relief to those who need it and not imposing extra work on third parties (booksellers) to handle the program.

What do you think?

http://www.tax.ny.gov/pdf/current_forms/st/st121_4_fill_in.pdf

Should schools and students pay sales tax (or VAT)?

http://www.boe.ca.gov/legdiv/legresearch.htm

It might seem odd for a state school or any government agency to pay taxes. Generally, they are exempt from income and property taxes, but likely pay sales tax (or VAT if outside the US) on purchases. Students of the state schools also pay sales tax on taxable items they purchase from the school bookstore or for their education (such as books).

Isn't this just a roundabout way for the state to be paying tax to itself?  Would it be more efficient to exempt purchases of state schools and agencies from sales tax?

What reminded me of this issue was an article about a bill (HB 4165) introduced in Singapore to create a VAT exemption for goods and services purchased from schools. ["Bill filed to exempt goods sold in schools from VAT," by Miranda, Business World Online, 5/23/14] The logic is also to keep school costs down. The bill sponsor suggests that when the school pays VAT, it must increase what it charges students.

California has had proposals to exempt textbooks and school supplies from sales tax. That is not easy to administer though because it is not clear that a book is a textbook (such as a novel) and some people buy textbooks or supplies that are not for school. See my 2/2/10 blog post. I note a few problems with such an exemption including complexity of defining the exemption and the reality that the seller might increase the cost of the items due to the exemption.

There are other ways to reduce costs for students, such by increasing government support through other spending cuts and efficiencies. But, that doesn't address the odd flow of funds when the state schools pay sales tax (such as a grade school buying textbooks), with the funds going to the state. Why not just exempt the direct purchase by the school.  I think the exemption for student purchases is the problematic one. For example, how does the seller know the buyer is buying the book or supply for school use?

What do you think?

AB 1178 Sales Tax Exemption on Textbooks - Wrong Way to Go!

AB 1178 has passed in the Assembly and gone to the Senate. This is too bad for good tax policy. AB 1178 includes a state level sales tax exemption for textbooks and supplies purchased by a student of a UC, CSU or community college between July 1, 2011 and December 31, 2014. [Click here for Board of Equalization analysis of AB 1178.]

The problems:

1) Makes the tax laws more complex: Can you imagine the complexity involved? Stores will have to verify that the buyer is a student in a public higher education institution and that the items are for school. And the store must still charge the local sales tax. This really complicates compliance for sellers of books and supplies - and that's a lot of businesses (college bookstores, Office Depot, 7-11, Costco, Borders, Safeway, etc.).

What if a student at a private college also takes a course at a public university? They will have an ID card from the public university. Is the store required to review their course syllabi or get a note from the professor to verify what is required for a class?

What if the supply is an iPod which will also be used personally?

This is NOT the way to write a tax law. Whenever there are special exemptions, rules are needed to define who gets that exemption and what exactly is exempt. That is complicated for both vendors and tax administrators.

2) Savings might not all go to the student: While the sentiment behind the bill - reduce cost of textbooks sounds good, it won't work. When stores are setting their prices, they are most likely to factor in that the students won't have to pay state sales tax on the item, so they can increase the price of the textbooks a bit.

3) Equity issue: Many students can easily afford textbooks and sales tax. This partial exemption doesn't factor in the income of the buyer. So, even wealthy students get a tax break.

4) Not needed: Students usually have lower cost options for acquiring books. Many find great deals online. Often they can buy a used book. They might also share a book and some schools have book rentals. Also, if a student in California gets an electronic copy, our sales tax already exempts that book (which is a flaw in the law).

5) Dishonest budgeting: This is deceptive by lawmakers. If they are concerned about costs for students in public higher ed, they should increase the funding that goes to these organizations so that fees do not need to be increased as much, so students can graduate earlier because more courses can be offered, etc. When lawmakers already control the funding of higher ed, there is absolutely no need to create a complicated, inequitable and unnecessary tax rule to reduce costs for students. They should use the budget line item instead.

I hope this bill is defeated by the Senate and if not, is vetoed by the Governor. Let's not make the California tax system worse than it needs to be and let's encourage legislators to reduce costs for college students by increasing funding for the UC, CSU and community colleges by an amount equal to the estimate of the tax dollars that would be lost from this inappropriate exemption.

Note: At least 9 states have exemptions for sales tax. I found a list at the Barnes & Noble website, which also includes instructions to student buyers that indicates the compliance complexity of such an exemption - here (see bottom of the bn.com page).

What do you think?