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July 17, 2013

Virginia’s Sales Tax Needs Updating

Virginia’s sales tax rate just increased as part of the new transportation funding package, but we’re still running on an old, inadequate version of the tax that threatens to hold us back in the long run. Enacted in 1966, the sales tax is one of the state’s largest sources of funding for public investments in education, transportation, and health care, but it is out-of-date and losing value. Modernizing the tax to reflect changes in how people spend their money will help raise the revenues necessary to keep Virginia competitive in the 21st century.

Here are some ways to update it:

Apply the tax to more services: Over the last several decades, the sales tax has brought in less revenue as consumers have spent less on taxable goods and more on untaxed services. In 1966, for example, services made up less than half of personal spending. In 2012, almost two-thirds of all personal spending was on services, many of them untaxed. Expanding the tax to more services can keep it from continuing to lose value.

Extend the sales tax to Internet downloads: While the CDs, books, and software we buy in bricks-and-mortar stores are subject to the sales tax, digital goods and services like music, audiobooks, computer programs, and other files downloaded from  the Internet are not. Extending the state’s sales tax to these purchases could bring in roughly $11 million more annually. 

Close the online hotel tax loophole: Virginia allows companies like Expedia, Orbitz, and Priceline to collect taxes on only part of the sales taxes due on hotel room bookings while requiring travel agents or consumers who book rooms themselves to pay the full tax. Requiring online travel companies to pay their share is a fair way to modernize the tax.

The sales tax is a critical source of revenue for the commonwealth. Updating it to better reflect what Virginians buy and how they buy it will strengthen Virginia’s ability to make needed  investments in schools, transportation, health care, and other foundations of a strong and resilient economy.

-Ben Paul, Program Assistant

The Commonwealth Institute

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