21st Century Taxation: 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?