I don't see the need to use a DAC....am I missing something?
It depends on quality of the DAC circuitry built into in the AVR and the connection type from the HTPC to the AVR.
When I had an HDMI AVR, I got better sound for music using the coaxial S/PDIF output of the HTPC (and even the TOSLINK optical output as well) versus the HDMI connection. When I added an external DAC, that increased sound quality a small bit again because that particular DAC was a little better than the AVR's internal DAC.
Adding an external DAC may or may not give you an appreciable increase in sound quality. The whole audio chain influences the sound - the digital source, the preamplifier, the power amplifier, the speakers, and of course the DAC.
If those components (and sections of the AVR in your case) are only mediocre, adding a $500, $2000 or $5000 DAC won't likely give you as significant of an increase in sound quality that someone with a higher quality, higher resolution system might achieve.
Steve