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Paying Sales Tax for Online Purchases

Written by Nickel - 40 Comments

Paying Sales Tax for Online Purchases

One of the reasons that many people love to shop online is that they can often get away without paying sales taxes. The reason for this is that companies without a physical presence (nexus) in a state aren’t typically required to collect sales tax.

This isn’t to say that you’re not supposed to pay tax on these purchases. In fact, if you make a purchase that would otherwise be subject to sales tax, you’re supposed to claim it on your state tax return and pay a use tax. But how many people do that? Not many. And states are starting to take notice.

According to a recent press release from CCH, 16 states have either enacted or proposed legislation to require online retailers to collect sales tax, or to “more strongly urge” consumers to pay their use taxes.

And the states aren’t alone in introducing this sort of legislation. Not long ago, the Marketplace Equity Act of 2011 (H.R. 3179) was introduced in Congress. This bill would allow states to require “remote sellers” to collect sales taxes, effectively ending the ongoing sales tax holiday that shoppers have been enjoying.

This bill, which has the backing of the Retail Industry Leaders Association, exempts “small sellers” with gross annual results of $1M or less nationwide, or $100k or less in a particular state from having to collect sales taxes. Interestingly, this bill has also attracted bipartisan support.

According to Rep. Steve Womack (R-AR), one of the bill’s sponsors, “The intent of this legislation is [...] to close a long-standing loophole that puts America’s brick and mortar businesses at a competitive disadvantage.”

Rep. Jackie Speier (D-CA) added that “The death of small businesses on Main Street can be attributed in part to the consumers who will visit the store test out the equipment, get advice on products like TVs and computers and cameras and bicycles, and then find and buy the item online, sometimes right on their mobile phone while still standing in the store.”

Sound familiar? I’ve been known to comparison shop in just this way — though I’m typically interested in the significantly lower prices that are available online, not the lack of sales tax.

So when might we see the online sales tax loophole closed? According to Daniel Schibley, a senior tax analyst for CCH, “While it may not have significant implications for this holiday tax season, consumers should be prepared to start seeing sales tax collected on more and more of their online purchases in the years ahead as cash-strapped states look for more revenue sources.”

What do you think? Are you hoping to see a leveling of the playing field between online and real-world retailers? Or will you miss the ability to shop online without having to pay sales taxes?

Hat tip: Don’t Mess With Taxes

Published on December 2nd, 2011 - 40 Comments
Filed under: Taxes

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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40 Responses to “Paying Sales Tax for Online Purchases”

  1. 1
    Sun Says:

    The playing field has always been level. Online merchants became vilified because government refused to enforce existing use tax laws. Much of the arguments I have read and heard from brick and mortars merchants are ignorant. They have no idea on how tax laws work and instead scapegoat online businesses for their own economic conditions.

    There are so many tax jurisdictions right now that a simple solution would be to collect a single tax rate per state. Online merchants of any size can easily account and submit payment in this type of situation. Phase II would be accurately tax and collect based on the ship to address.

    The other set up is to have payment processors do the work. Receive payment from customer and split the payment three way: 1) local tax, 2) state tax, 3) rest goes to merchant. Payment processor sends a quarterly tax statement to the merchant each quarter.

    You don’t need any new tax laws… just ENFORCE the existing tax laws in place.

    I’m not looking forward to these new tax changes. Any time you make decisions from a place of desperation, the results are less than ideal.

  2. 2
    Lance Says:

    Simple change, along the lines of the book Nudge: Rewrite the state tax forms so paying the “use” tax is the default option, with a flat fee based on their income bracket. To get out of paying it, taxpayers must certify that they did NOT have any untaxed state law transactions last year or itemize them if they think they’ll end up paying less. Compliance will skyrocket.

  3. 3
    Heather Says:

    Supopsedly on AZ’s tax forms this year upcoming, there will be a space for online purchases … and anyone who leaves it blank (or enters 0?) will be audited.

    Interested to see the tax forms and learn if at least the first half of that is true. Not going to test the second half…

  4. 4
    Sun Says:

    > and anyone who leaves it blank (or enters 0?) will be audited.

    All of the sudden a broke state can provide the expense for an auditor. Why wasn’t this done before by AZ if this was such a problem?

  5. 5
    Jonathan Says:

    I wonder what capabilities the govt can exercise under an audit in this regard. Anyone know?

  6. 6
    Heather Says:

    Don’t get me started on all of the things broke AZ magically has the money to pay for…

  7. 7
    BG Says:

    It won’t be long before a state sets up a system to collect duties on imports, much like countries have. I don’t shop online, because I understand the importance of supporting local tax paying businesses. And besides, most local retailers will price match an online competitor. If you still decide to purchase online, you are simply a tax cheat. Enjoy the race to the bottom.

  8. 8
    Sun Says:

    > If you still decide to purchase online, you are simply a tax cheat

    Apparently, everyone who buys online does not declare use tax? You sound like an ignorant brick & mortar retailer.

  9. 9
    BG Says:

    Sorry, meant to say “if you shop online and don’t declare the use tax”. And that would be 99.9% of online shoppers. Thank you for being in the 0.1%.

  10. 10
    Heather Says:

    “I don’t shop online, because I understand the importance of supporting local tax paying businesses.”

    I support local businesses when I can, though I don’t know anything about their accounting. That said, there are many things that are not available in a local brick-and-mortar store, and many others that no local mom-and-pop shop exists (so price-matching doesn’t happen).

    You comment could be generalized to assume that in states where there is no sales tax, no one shops online.

  11. 11
    BG Says:

    Heather) The local businesses are employing (or owned by) your neighbors, and those businesses are paying income and property taxes to your state to fund your schools, pay for roads, and other state (and local) government services. Sales taxes are always on the consumer (not the business), which is why you are supposed to pay the use-tax when you import goods into your state that don’t already have your local & state sales taxes paid on them. When you ordering online, you are importing goods into your state.

    If it is some extremely arcane item, that no local shop carries, then I will go online to purchase the item. One that comes to mind are bulbs for my JVC TV — and for those items I submit Texas Use-Tax Form #01-156 (each state has their own forms) to pay the use tax on those goods I import.

    “You(r) comment could be generalized to assume that in states where there is no sales tax, no one shops online.”

    I am sure there is much less incentive to shop online in the five (5) states that do not have a sales-tax. Likewise, I suspect the incentive to shop online (and not pay the use-tax) is highest in states with the highest sales tax rates, like Illinois with an 11.5% sales tax. I think the best comparison would be to look at shopping habits in New Hampshire (0% sales tax) and Vermont (6-7% sales tax), since those states border each other and are relatively the same size. In fact, I would not be surprised if a lot of people in Vermont drive to New Hampshire for purchases (and again refuse to remit the use-tax on their imports).

    I personally have never met a single person (in person) who has paid the use-tax. Most people I mention this to (after they brag about a massive online purchase), say they had never heard of the use-tax. I have even had people admit that if they paid the use-tax, then the online purchase is NOT the better deal (especially when you look at shipping charges, or time waiting for the purchase during shipping).

    Most of the online retailers are profiting at the expense of their customers cheating their own states out of legally required revenues. They are “aiding and abetting” tax cheats. And if this were not true, then those online businesses should have no problem handing over records indicating purchase amounts and shipping addresses to states so the states can enforce the use-tax requirements.

  12. 12
    John Clark Says:

    I paid use-tax to the State of Michigan when I lived there (I’m in the military and still technically a resident, but stationed elsewhere); I’ve always opted to use the standard tax amount based on my income when filing my taxes.

    Honestly, even if online retailers do start collecting sales tax, I will still go into the brick and mortar stores to research and put hands-on a product. Then I will STILL pull out the mobile phone and buy what I want online (ok, so that is rare, I don’t normally do that). Sales tax or not, online retailers tend to have cheaper prices than in store.

    There are always exceptions, though. Usually they’re clothing items, food, and other bulky things that I suspect I may have to return to the store.

  13. 13
    Chucks Says:

    >And besides, most local retailers will price match an online competitor

    Hah! That’s a good one. I have yet to see a brick and mortar store with a pricematch that doesn’t specifically exclude online retailers. Nearly every product outside of large yet inexpensive items (many groceries) can be found online for less than a conventional store. You think you can walk into a Barnes and Noble’s and expect them to match Amazon’s prices?

  14. 14
    BG Says:

    I purchased a Yamaha rx-v371 receiver at best buy last week, and the amazon price is $229, exactly what I paid in my local best buy. Not sure why you automatically think online is cheaper, unless you are including the tax cheating in your calculations.

  15. 15
    Chris Says:

    I do my best to keep track of my online purchases and then pay the taxes to my state (PA), but I must say, it is a pain. PA wants your taxes paid quarterly I believe, but I generally just write one check at the end of the year. For 2012 I understand that they’re adding a line to our state tax form. It’s easier with Amazon, because I can easily review my shopping history. With other stores, this is painful since often don’t allow you to review your order history. This is just a pain because I have to do quite a bit of extra work to keep track of things. Also, there are some items in PA that are exempt from taxes (food, clothing, and some other oddities), so sometimes you don’t immediately know what should have taxes on it. For example, a pair of jeans is not taxed, while a swimsuit is. I’d rather they just collected taxes with online purchases and make it easier.

  16. 16
    Kev Says:

    @BG. The savings I get from shopping online typically comes from increased selection.

    Example: I recently purchased a USB Hub. I went to my local Best Buy and Office Max and was less than impressed by the limited selection and high prices. The only USB hub Best Buy had that looked decent to me cost almost $40.00!!! I thought that was insane. I returned home, checked out newegg and was flooded with choices. After a little bit browsing and review reading, I decided on one. It cost $15.00 and had free shipping. In my honest opinion it is actually nicer than the one Best Buy was selling for $40.00.

    You’re correct. I could have bought the same hub that Best Buy had and paid roughly the same amount for it online. The online store game me choices though – a ton of them, and that in turn saved me a lot of money.

  17. 17
    Heather Says:

    I would also rather support an online mom-and-pop store than a brick-and-mortar big chain. I can’t speak to electronics, but with a new baby, I can tell you there are a zillion tiny baby-stuff stores online, many of them with items not available at the big box baby stores. (If you want to go green with a baby, shopping offline isn’t an option.)

  18. 18
    Steve Says:

    I pay sales tax when I shop on Amazon (since I live in Washington state). Perhaps I am just proving the point, but I generally don’t take lack of sales tax into account when buying online. Not only are the prices and selection typically better online, but furthermore, I can often see reviews by other users to help me decide what to buy. I have never seen a review when I was at a brick and mortar store! That is often (though not always) more helpful than getting to try out an item in person. For items such as clothing where trying it in person is more helpful, amazingly enough I tend to buy those items in person. I am not the type to spend a lot of time in a store, then go buy it somewhere else. Though it’s not a hard and fast rule – it depends on how much cheaper it is online, and how much in-person handling of the item I need to do, as well as whether that handling involves a trained salesperson or is just checking out a display model.

  19. 19
    BG Says:

    Kev, good point. I normally go to Fry’s for something like that, and they match online prices. Stocking a single hub and a $40 one at that is just wrong. anyhow, your purchase sounds like it falls under ‘arcane item that no local shop carries’, and I’d purchase it online if I were in your shoes, too.

  20. 20
    Nickel Says:

    Interesting discussion, thanks for all your contributions. I can honestly say that, if taxes were collected for online purchases, it wouldn’t change my shopping habits. To the extent that I shop online, I do so for convenience, selection, and (often) better prices. What I don’t like is being required to track this stuff myself and comply at the end of the year. I would much prefer having it collected at the time of sale so I don’t have to deal with it.

  21. 21
    BG Says:

    Nickel) I’m with you, it would be so much easier if online shops just collected the ‘use-tax’ and remitted to the states for us. Unfortunately, its unconstitutional for a state to force online retailers to do that (HR 3179 will likely be found to be unconstitutional), unless that business has the ‘nexus’ in your state.

    The only alternative is to educate shoppers, and for states to make it easy to pay the use-tax after the goods are imported.

  22. 22
    Chris Says:

    Nickel & BG,

    Yes, as I had mentioned earlier it WOULD be easier if taxes were just collected online. Amazon has ducked the ‘nexus’ test in Pennsylvania in the past despite the fact that it has a number of warehouses in the state. It has been able to do this because the warehouses are subsidiaries of Amazon.

  23. 23
    Chris Says:

    Here’s a timely article about online taxes in Pennsylvania…

    38 of top 50 online retailers collect taxes in Pa.
    By Jim T. Ryan

    Thirty-eight of the top 50 online retail companies have a license to collect sales taxes in Pennsylvania, but not Amazon.com Inc., the largest technology and online retailer in the U.S., according to the state Department of Revenue.

    The analysis was part of the department’s review of online retailers as Pennsylvania gears up to enforce collection of sales taxes by those companies with a physical presence, associates or affiliates promoting online sales in the state. The department announced Dec. 1 that it intends to enforce collection from online retailers starting Feb. 1.

    Seattle-based Amazon, which has five warehouses in the state, including three in the midstate, does not have a sales tax license, said Elizabeth Brassell, a spokeswoman for the Revenue Department. Amazon has two warehouses in Cumberland County and one in York County operated by subsidiary Amazon.com.dedc LLC.

    The department’s analysis is based on Internet Retailer magazine’s Top 500 online retail companies, Brassell said.

  24. 24
    M Penfold Says:

    The government keeps on adding new taxes. Lots of people are struggling during these hard economic times. Many are just trying to save their pennies. The recession is far from over. I love how the government will bail out the Big banks but not the average person who.

  25. 25
    Funny about Money Says:

    Arizona’s sales tax is almost 10 percent.

    I had not heard that AZ intends to audit every return on which a taxpayer claims not to have ordered anything online. That would be prohibitively expensive, since the state has a large retiree population, many of whom presumably do not buy much online; a very large population of people living below the poverty line, who also presumably are not buying a lot online; and a vast number of de facto tax resisters.

    One could say that it would be stupid, too, since all one would have to do is claim a single $10 Amazon purchase, pay your buck on it, and wave good-bye to the auditor. However, “stupid” defines this state’s political leadership…so I wouldn’t put it past them.

  26. 26
    Heather Says:

    http://www.azcentral.com/busin.....taxes.html

    For AZ returns

    (Not saying it’s smart…)

  27. 27
    Funny about Money Says:

    @ Heather: Hmmmm….interesting. Howsomever, note that the thing reflects the typical Arizona Repulsive reporting style: the statement that anyone who leaves the line blank will automatically be audited is a quote from someone who’s passing along a rumor she got from someone else. It’s hearsay of hearsay.

    Is it credible? Anything’s possible, especially around here. It’s a little hard to believe, though, that our impoverished state gummint has the resources to hire enough auditors to audit almost every tax return that will be submitted in April 2012.

  28. 28
    Sun Says:

    You can make of it what you wish. I read in a book from a former IRS agent, that the going rate for auditing self-employed businesses is about 3%. I don’t know if you can extrapolate to other populations, but I think state government being without resources may be using fear tactic for compliance. Arizona is famous for passing laws based on fear, especially race based initiatives… so I wouldn’t be surprised if the citizens of that state fall for other type of fear tactics.

  29. 29
    Logical Thinker Says:

    I have a good idea to make the playing field level- STOP CHARGING SALES TAX PERIOD! The government misuses our money and overspends. We should take away the credit card, not increase its maximum, by giving them more tax money to blow!

    But oh, no. They don’t want to make the field level by taking away money from themselves. They want to level it on the backs of the taxpayers and give themselves more of our money!

    The other day I was shopping at a CVS in Washington DC, and as I was doing the self checkout, the machine asks if I am using a bag since there is a tax now on bags since they destroy the environment. Then I thought, “How does paying the government this tax help reverse the damage I am doing to the environment by using this bag?” Answer- IT DOESN’T. It’s just another way for them to take my money and throw it in the general funds while promising to “plant a tree” to offset my sins.

    WAKE UP, PEOPLE!

  30. 30
    Sun Says:

    Alaska, Delaware, Montana, Oregon, New Hampshire all do not charge sales tax… although there are various local taxes that are applied.

  31. 31
    Benjamin Says:

    I am in agreement that sales taxes should not be collected at all, unless for a specific purpose, such as funding the Attorney General’s office or similar consumer protection measures. Businesses that own property in a state should and do pay property taxes, as well as other local taxes and fees for operating there. If an online company sells products in the same state, it’s only logical that they should pay and collect less taxes because they have no property in the state, and their only operation is to deliver that product to the customer (in many cases that shipping is taxed already). Government taxes at every level should have a more direct link between the tax levied and the funded service provided. If we knew specifically what sales tax monies were used for, we could make a more intelligent argument one way or the other about whether more sales taxes are needed. I think most people would agree that money has been and continues to be wasted, and so it’s hard to commit more of your own dollars to someone else’s (faulty) judgement.

  32. 32
    John Says:

    Online businesses should be provided an easy system to collect state sales tax and use taxes for all 50 states. And an easy system to pay those taxes to each of the 50 states. Consumers already have complicated tax “returns” and if you complicate their lives even more they may as well stop spending!

  33. 33
    Boxtavious Says:

    In Arizona, without a table, calculating the use tax can be a huge burden. I still don’t see how coming after anyone with an income under 100k would yield a substantial amount of money especially when the state will be saddled with the burden of having to prove I didn’t spend sales tax on it. The best they can do is get the big stores like amazon to give them customer lists which could take years to go through and find out transaction history.

    Arizona financial responsibility at its finest!

    Give me a standard number and let me prove I didn’t spend that much, as is normal for to claim a deduction below the normal tax.

  34. 34
    Sid Says:

    I live in NH and can testify that hundreds of Taxachusetts residents already come to NH to avoid sales tax when shopping. (we have no retail sales tax at all in NH)

    We personally run a retail location and a website. Are we supposed to ask for ID in our store and charge MA residents more than our other customers? Or do these proposed taxes just apply to screwing over our internet customers?

    And are we supposed to file paperwork with every individual county in every state where we have a customer? Sure there’s software that can calculate the taxes for us, but does this software also file the taxes for us with all 10000 counties where we might make a sale?

    It’s not the retailers fault (internet or brick and mortar) that some states lawmakers are fiscally irresponsible when it comes to running a budget. If they’re looking to blame someone for a leaky revenue bucket, maybe they should start by looking in the mirror!

  35. 35
    Sky Walker Says:

    We need good, excellent, well-reflecting mirrors! Lots of them!

  36. 36
    LARRY Says:

    ” Government taxes at every level should have a more direct link between the tax levied and the funded service provided”

    When you have literally dumb people that don’t read what they are voting for, what’s next? Prop 30 in California passed. It was advertised as money for schools but nowhere in the proposition does it explicitly ear mark the money for schools.

    Another proposition had wording where if you voted yes for the proposition, you were actually voting no for the death penalty.The other con was the claim that voting against the death penalty would save 1 billion dollars over 5 years(200 million/year) and then they only earmarked 10 million per year towards law enforcement. Where would the rest of the projected 190 million/year “saved” be going?

    And California’s idea of passing a budget the last time was to decide on one……….that relied on people, in the future, voting in taxes! Nothing was said.

    California also stole the money from the gas taxes to use somewhere else then said hey, they shouldn’t have done that and offered a law that would make those taxes only for the roads. Nobody’s head rolled. People are either stupid, tired, etc. In any case they aren’t paying attention and until they do, it’s going to be difficult to get the money specifically earmarked as it should be, like you suggested.

    And soon, there will be more non-tax payers than tax payers.

  37. 37
    Atty Says:

    Improperly wording voter messages is criminal offence.

  38. 38
    Jonathan Says:

    @Larry, I think every state does this… I see “backwards” wording all the time in state and local propositions in my state.

    I am confident that they do this because they know people do not research these things ahead of time and will be confused.

  39. 39
    Ree Says:

    I recently just did my 2012 tax return, and they require me to sign a document that either declare of how much I spend on online purchases or just tax me based on a percentage of my income. Isn’t that double taxing?

  40. 40
    Drew Says:

    The ONLY reason why my small business has moved to USA 15 years ago was NO IMPORT DUTY. The day it is introduced there will be NO icentive for me to remain in the USA as EUROPE is much more attarctive to live and I will be moving with thunder!

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