The myth of tax free internet sales
It has been a long held belief by most online shoppers that out of state internet purchases are tax free. I have to admit that I believed this for a long time myself, but unfortunately it’s not the case.
Just to dispel any theory dissolving that old ‘Death and Taxes’ quote, internet purchases are not tax free. That’s right. As the wording goes, most internet companies don’t have to collect out of state sales tax. However, consumers, businesses and any end users still must pay a “Use Tax” on non-taxed purchases that they make through mail-order or online.
Most states currently have Use Tax which specifically requires consumers to pay their state sales tax on purchases they make online that are not taxed by the business. There are some exemptions for certain types of products and for states that do not have any sales tax, but for the most part, taxes on these purchases are required to be paid to your state government. With the exception of very large purchases, use tax is rarely if ever monitored, as it would simply be an impossible feat for any state government to handle. However, we can all be sure that states are losing out on millions if not billions in uncollected taxes, so if you aren’t paying them, enjoy the free ride while it lasts.
Here’s a Use Tax table that I came up with covering which states require it:
(Let me pre-apologize about all of the PDF links here, Government websites are about as bad as they come, and in many cases PDF’s are the only pages available.)
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Thanks for compiling this information. This is very helpful.
Darpan
Hi,
Just curious if this is in addition to sales tax, or instead of? In other words…if the online merchant pays the state sales tax, is the consumer still obligated to pay usage tax?
Thanks!
the same is also in europe, not only in North America, and probably all nations?
A long as sales or use tax is paid by either party then everything is OK. It doesn’t need to be paid more than once, but one or the other does need to be paid.
If you know any specific links to rules in Europe let me know and I’ll post them up here.
I think the biggest issue is that people actually think that their purchases are tax-free when they definitely aren’t. I doubt that most people are even doing it intentionally, but I think that a huge number of sales go completely un-taxed.
i think it depends on the company/place where u buy it from, because i know places, such as ‘abes of maine’ i dont have to pay taxes. i wish it was more widespread :S
-jack
If I sell a publication online to persons out of state
I do not need to pay sales tax,Right?
But, If someone in my state buys it then a state sales tax is expected from my end, Right?
What about my city Tax?
My business is sole propriotor
Sales tax is usually calculated based on the state, county and/or city. Here is Austin, Texas the state sales tax is 6.25% and the city tax is 2% for a total of 8.25%.
So when you sell online you need to collect sales tax from your customers for orders that are “shipped” in the same state that you operate in. You then need to pay your local gov’t the sales tax you collect.
You should contact a local tax office for the exact procedure and frequency you need to pay sales tax.
Well, until my state figures out a way to track my credit card purchases, I claim $0 subject to use tax on every tax return.
One of the reasons I shop online is to avoid state sales tax, which is too high. I’m certainly not going to pay it voluntarily until they can prove what I bought.
[…] Let me clear this one up:Â in most states with some sort of sales tax (I hesitate to say all, but here’s a list), you owe sales tax on all purchases, internet purchases from foreign or out-of-state vendors […]
[…] Let me clear this one up:Â in most states with some sort of sales tax (I hesitate to say all, but here’s a list), you owe sales tax on all purchases, internet purchases from foreign or out-of-state vendors […]
Updated links to the states that were missing.
[…] They call it the ‘Use Tax‘. It exists outside of South Carolina as well, and you can check up on the various states Use Tax laws here. […]
I know this is old. Hope you read it. I’m in Arizona. The state just started talking about taxing for online purchases BUT nobody knows how… and I understand why. When I had a business the code said our Use Tax or Transaction Privelege Tax (as it’s called here) only applied to other sales within the state. And the city taxes mostly worked the same. BUT… if what you are saying here is right, then a purchase I make online from my AZ home is from a company in IL, then Illinois collects the tax? My purchase in AZ helps AZ by 0% but helps IL by whatever their tax rate is.
If that’s the case, it’s actually better to buy local and pay the tax to your state where it can be used (in theory?) for your benefit. Otherwise each internet purchase that’s taxed only benefits that other state!
I own an e-commerce store and I think the whole concept of an internet sales tax is ridiculous. Brick and mortar businesses say its needed to “even the playing field”. In reality the playing field is already even, with the addition of a sales tax it tilts to the brick and mortar stores favor. The reason…shipping costs. The money that on line shoppers save in sales taxes, they end up spending on shipping. Now they have to pay both online sales tax and shipping cost. This is a clear advantage for brick and mortar stores. I’m glad most shoppers don’t know about internet taxes or refuse to pay them, however I worry that at some point the Gov. may try to force e-commerce stores to collect it for them.
What if what you purchase online is a virtual product? Hence… there is no tangible property, no shipping… it’s internet access to a course. Does it matter where the business is or where consumer is? I don’t see how you could implement sales tax on this?
Tod,
Actually the Illinois company is not responsible for the tax. You are. So legally, you are supposed to pay the tax to the state of Arizona for the purchase. Illinois will get the income/property tax from the Illinois business.
What’s going on right now is that there isn’t a federal law that gives states the right to pass legislation requiring out of state businesses (without what is called a “substantial nexus”) to collect and remit the tax for you. States are allowed to pass these laws if businesses have brick-and-mortar operations…so when you shop locally you give the sales/use tax to the seller, then they remit it to the state (probably monthly). Then you don’t have to worry about it.
Now of course, everyone likes paying less tax (like Fed Up above), but a problem that is occurring is that small businesses have to compete with online retailers unfairly because the Internet retailers help individuals evade state tax laws. When Fed Up goes to the local jewelry store and checks out all the merchandise, drinks the complementary glass of Champaign, and finds the engagement ring he wants to buy his future fiancée…he then heads home and buys it on the Internet from an out of state business. They don’t force him to pay the sales tax and he saves himself 6%. He lies at the end of the year and claims $0 in use tax on his return.
Not only is he cheating all of us by not paying his taxes (we are the state and the city after all, and the small business pays income and property taxes…and probably sponsors our kids’ Little League teams, too), but he’s also driving prices up for the rest of us. If the taxes he avoided were 10% (State + County + City), then that means the online seller actually charged him 4% more for the goods (apples to apples) than the local business would have. The online retailer simply didn’t make Fed Up pay the tax up front, and instead jacked up the actual profit they made on the sale. The retailer encouraged and facilitated Fed Up’s tax fraud, and charged him more than the product was worth.
It hurts the small business owner, the state, the city, fair competition, and even the buyer.
reywalgoh, you are forgetting the fact that any brick-and-mortar business selling items that can sell online and isn’t doing so is just being plain dumb for many reasons, the tax issue being one. Sorry there is no other to put it.
In fact the majority of consumers have more trust in an online store which is also a brick-and-mortar store.
If you have a company that refuses to accept payment for a adjusted invoice that did not include sales tax but you are paying it. You is then the responsible party for reporting the tax?
Here in Missouri the Department of Revenue is conducting audits on businesses going back 5 years. They check all purchases including online purchases. It is the responsibility of the business to provide proof that the “use tax” has been paid if purchase was made from an out of state vendor and shipped into Missouri; or sales tax if the purchase was made within the state. The department is collecting hundreds of thousands from businesses in MO. They compare IRS forms to state forms to verify sales; they audit all payments to all vendors. Businesses are required to turn over all electronic and paper records. Any missing invoices or receipts – they charge tax – plus interest and penalties from the date of the sale. Between EPA, OSHA, IRS, State recordkeeping regs, and insurance… Is it any wonder the price of everything is skyrocketing? I’m thinking the best place to work is for the government. Isn’t that what they want???
A group of the nation’s governors, state legislators and state tax administrators are asking the United States Congress to require catalog companies, online retailers and live television shopping networks to collect sales taxes from their customers, even if they live in states where the retailers have no operations. While all retailers must collect taxes on sales in a state where they have a physical presence, the Supreme Court has held that it would be a burden on interstate commerce to force retailers to collect and remit taxes for sales in states where they are not located.
Great post! Thanks for sharing this! Very informative. I’m sure this is very helpful for other people too who are into Payment processing programs.
Use taxes should be illegal. Taxes are NOT assessed in order to make states rich, but in order to pay for goods and services those states provide to their residents. If someone buys a CD from a company in another state, what has the state where he/she lives done to deserve tax income for this? Answer, NOTHING! As for brick and mortar stores complaining about “no” taxes, the use tax, which almost every U.S. state has, shoots down this lie. Many, of course, do not pay, or do not even know about the use tax. Good, as the states mismanage and spend more than the tax revenues they already have, while giving free stadiums and other perks to millionaire sports team owners.