For a number of years, I have been promoting broadening of state sales tax bases to include 21st century types of consumption, such as iTunes, ringtones and digital books. The broadening though, should not include items purchased by businesses in order to avoid pyramiding.

This year, Minnesota enacted legislation, effective 7/1/13, to broaden its sales tax base to include many types of digital goods. One of the exemptions provided is for textbooks and other instructional materials that students are required to purchase. But to get the exemption, the student has to provide the seller with the Form ST3 exemption certification (see the excerpt above of this 1 page form with 5 pages of instructions, which do not yet cover textbook purchases).

So, imagine a Minnesota college student deciding to be green and save money and buys the digital version of her textbook. If the seller is subject to Minnesota sales tax collection, they need to charge the sales tax unless the student provides the exemption certificate. How is that to be done for this electronic transaction? Hopefully, e-vendors subject to Minnesota sales tax collection have an online form for the students to use. Will students appreciate the significance of completing such a form?

If the seller is not subject to sales tax collection in Minnesota because they have not physical presence there (and have not voluntarily registered with SSUTA states since Minnesota is a member), does the student need to let the state know the purchase is exempt from use tax? If yes, how?

I think this challenge illustrates more the problem of providing exemptions than it does taxing digital goods. It would be better to tax all digital goods purchases of consumers. A broader base can allow for a lower rate. If the state wants to provide some relief to students or schools buying digital goods (or tangible ones too), it should be done in some other way. Perhaps a voucher for college students who also qualify for Pell grants.

In accordance with Circular 230 Disclosure