No-tax shopping is a huge draw for online retail stores. Shoppers are lured by the efficiency of online purchases and the possibility of not having to pay any sales tax. However, it is a misconception that all Internet sales are exempt from sales tax. Also, consumers are technically responsible for remitting any unpaid sales tax on online purchases to their state. The sales tax is an issue for states hoping to generate income from Internet sales.
The duty to pay the Internet sales tax is determined by the location of the buyer. It is not determined by the location of the seller. If the business is not physically present in a state, it is not required to collect sales tax for sales from that state’s customers. For example, if you live in California and buy something online from a retailer in Georgia, you do not have to pay sales tax. However, if the retailer suddenly opens up a warehouse or store in California, you would then have to pay taxes. It should also be noted that some companies create separate legal entities to handle their Internet business (so that you won¿t have to pay sales tax).
What is My Responsibility to Pay Sales Tax?
If you live in a state that collects sales tax, you are technically required to pay sales taxes that you avoided on the Internet to the state (called a "use" tax). This is to ensure that the state collects revenue on every taxable item. However, states have usually only attempted to collect use tax on big-ticket items, such as cars and boats. Some states have tried to increase their efforts in collecting use taxes, but most states have not.
What Are the Recent Developments Concerning the Internet Sales Tax?
In 1998, the Internet Tax Freedom Act was passed. This Act established a 3-year moratorium on taxing Internet access services (i.e. providers of connectivity and information). The ban was extended for two more years in 2001. In 2002, 40 state governments and the District of Colombia banded together to simplify their sales tax codes to make collection easier. They created the state-led initiative, Streamlined Sales and Use Tax Agreement (SSUTA). It is estimated that state governments will lose $35 billion from Internet sales this year. Other important developments include:
- 20 states, including California and New York, have modified their income tax forms, requiring taxpayers to declare any taxes owed on out-of-state purchases
- As stated above, 45 states require buyers to pay sales taxes on Internet purchases, but a few exempt low-ticket items
- Some major retailers, such as Wal-Mart and Target, voluntarily collect state taxes
Do I Need an Experienced Tax Lawyer?
A tax law attorney may be able to keep you up to date with the developments in this evolving field of taxes. It is important to keep aware of the ongoing changes to the tax system in general and to the Internet sales tax in particular if you make many purchases online.