One problem is that it encourages using items with negative sales tax for other purposes with value lower than the true cost (i.e. it can induce inefficient demand).

There are similar issues in agriculture subsidies and price regulation. E.g. High fructose corn syrup is probably as popular as it is because corn has been subsidized and cane sugar has a regulated (high) price. It's kind of like an inefficient arbitrage between physical goods to avoid taxes.