Online Business Law--Internet Sales: Not Always a Tax-Free Zone

Tracey M. Martin-Henry

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Internet Lawyer

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Posted almost 3 years ago. 1 helpful vote

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1

Collecting Sales Tax

If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

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Streamlined Sales Tax Project

For a while, some big retailers with local stores sold their products tax-free over the Internet by creating separate legal subsidiaries to handle Internet business. However, lawsuits by several states and pressure from the Streamlined Sales Tax Project (a group created by states supporting the Streamlined Sales & Use Tax Agreement, discussed below) has ended that practice of avoiding sales taxes.

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Consumer Responsibility to Pay Online Sales Tax

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax. The only difference between sales and use tax is which person -- the seller or the buyer -- pays the state.

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Use Tax

Theoretically, use taxes are just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders. But because collecting use tax on smaller purchases is so much trouble, states have traditionally attempted to collect a use tax only on big-ticket items that require licenses, such as cars and boats. That, however, may be changing. Many states have reevaluated their attitude towards collecting use taxes. For example, New York state has added a line to income tax returns requiring all residents to calculate how much they should pay on Internet, mail order, or out-of-state purchases. California has begun a campaign to educate taxpayers on what's owed, as well. Watch for more states to step up use tax collections

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Predictions on the Internet as a Tax -Free Zone

The question becomes will the Internet purchases remain free from sales-tax? We'll find out in coming years as Congress and state legislatures wrestle with this issue. Naturally, there is a great deal of opposition to the current approach, and state governments and brick-and-mortar retailers are seeking legislation to overturn the 1992 Supreme Court ruling. A look at the numbers explains why -- sales tax revenues currently amount to about $150 billion annually and make up approximately one-third of all state revenues.

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States Without Sales Tax: What Taxes Pay For

These taxes pay for everything from schools and police to roads, parks, and other state services. California alone estimates losses of over a billion dollars per year in sales tax revenues. States that don't have a personal income tax, like Texas, are even more dependent on sales tax revenue. (The five states that don't have a sales tax -- Alaska, Delaware, Montana, New Hampshire, and Oregon -- aren't hurt at all.)

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Streamlined Sales & Use Tax Agreement

In 2002, state governments organized to fight back. Under a state-led initiative known as the Streamlined Sales & Use Tax Agreement (SSUTA), 40 states and the District of Columbia banded together to simplify their sales tax codes in order to make sales tax collection easier. Under SSUTA, the collection of sales tax still remains voluntary. However, it is considered a necessary stepping stone to federal legislation.

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Future of Streamlined Sales & Use Tax Agreement

The SSUTA has gained traction. Several national retailers have negotiated with member states for amnesty deals in return for future collection of sales tax, and more are expected to follow. In addition, several states have already amended their tax laws to conform to the SSUTA. With all of this pressure from states, many expert believe that within the next few years you'll be throwing a few more dollars into your shopping cart for state sales taxes.

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Best Business Practice Pointer

If you are charging sales tax, you need be familiar with applicable rates. Determining which sales tax to charge can be a challenge. Many online retailers use online shopping-cart software services to handle their sales transactions. Several of these services are programmed to calculate sales tax rates for you.

Additional Resources

More Information About Internet Sales Tax •E-fairness (www.e-fairness.org) represents retailer organizations lobbying Congress for equal taxation. •The Sales Tax Institute (www.salestaxinstitute.com) provides a range of services and links associated with sales tax. •The Streamlined Sales Tax Governing Board (http://www.streamlinedsalestax.org) maintains a website detailing the organization's progress.

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