- Days left

Online Sales Changing the Tax Game

a computer icon of a tax folder - online sales tax postNine in 10 retailers are expected to offer online deals today, Cyber Monday, according to the National Retail Federation. Those deals are expected to push online sales to $32 billion during the holiday season, up more than 10% from last year.

Numbers like these should have retailers salivating, and encourage state and local governments hoping to fill some gaping holes in their budgets caused by revenue shortages from the past few years.

Forty-five states rely on sales taxes on goods and services as part of their annual state budgets; the exceptions are Alaska, Delaware, Montana, New Hampshire and Oregon. Rates range from 4% to 8.25% at the state level, with local additions boosting rates to over 10% in some municipalities. That should translate into a combined boost of over $1 billion in sales taxes for those states that do charge sales taxes -- not a bad haul by any standards.However, state and local governments shouldn't start spending those dollars yet. It's estimated that nearly $19 billion in online sales and use tax will escape collection in 2010; by 2012, that number is expected to climb to $23 billion.

States have been trying to dream up ways to boost collection efforts in an effort to recover some of that lost revenue. Allowing online retailers to avoid collecting tax is, the states argue, unfair to local businesses that are subject to the tax. It also increases administrative costs at the state and local levels since many states, such as Pennsylvania and Massachusetts, impose a "use tax" on residents. A use tax is generally imposed at the same rate as a sales tax and is levied on residents of a state who buy products to use in the state. This means a product that might not have been taxed online (or that might have been physically purchased in another state, like Delaware, not subject to sales tax) must be separately reported by the taxpayer and the resulting tax must be paid. Realistically, few taxpayers actually report and pay use tax, leaving huge gaps in expected tax collections versus actual collections.

Of course, this doesn't mean states are ready to give up that extra revenue just yet. Some states are stepping up efforts to collect from taxpayers who refuse to report. In North Carolina, for example, the Department of Revenue is trying to force online giant Amazon.com to hand over its resident customer list so it can match up sales with reports. Other states, like Texas and New York, are making real efforts to establish a legal basis for collecting sales tax from Internet sales. So far, their success has been mixed.

It may finally fall to Congress to make the laws more friendly to states that are seeking to enforce sales tax laws based on "presence." At least one bill, H.R.5660, also known as the Main Street Fairness Act, has been introduced this year in an effort to subject online sales to the same tax scheme as in-person sales. The bill currently sits in the House Committee on the Judiciary, which means, for now, states are on their own.

This Cyber Monday, it may feel as easy as a click of a mouse to make online purchases, but the laws surrounding those purchases can be complicated. It's important to know what the rules are for sales and use tax in your state -- and to keep up with the changes. Technology is moving fast, and state taxing authorities are hot on the trail.

Increase your money and finance knowledge from home

How Financial Planners go Grocery Shopping

Learn to shop smart and save.

View Course »

Building Credit from Scratch

Start building credit...now.

View Course »

TurboTax Articles

Cities with the Lowest Tax Rates

The total amount of tax you pay reaches far beyond what you owe the federal government. Depending on where you live, most likely you're required to pay additional taxes, including property and sales tax. The disparity between the amount of tax you pay in a low-tax city and that in a high-tax city can be dramatic. Living in any of these 10 cities could save you a bundle, although the exact amount may fluctuate based on your income and lifestyle choices.

Cities with the Highest Tax Rates

Much ado is made in the press about federal tax brackets, but cities can carry a tax bite of their own. Even if you live in a state that has no income tax, your city may levy a variety of taxes that could eat away the entire benefit of living in an income tax-free state, including property taxes, sales taxes and auto taxes. Consider all the costs before you move to one of these cities, and understand that rates may change based on your family's income level.

Great Ways to Get Charitable Tax Deductions

Generally, when you give money to a charity, you can use the amount of that donation as a deduction on your tax return. However, not all charities qualify as tax-deductible organizations. While there are many types of charities, they must all meet certain criteria to be classified by the IRS as tax-deductible organizations. There are legitimate tax-deductible organizations in many popular categories, such as those listed below.

A Freelancer's Guide to Taxes

Freelancing certainly has its benefits, but it can result in a few complications come tax time. The Internal Revenue Service considers freelancers to be self-employed, so if you earn income as a freelancer you must file your taxes as a business owner. While you can take additional deductions if you are self-employed, you'll also face additional taxes in the form of the self-employment tax. Here are things to consider as a freelancer when filing your taxes.

Tax Deductions for Voluntary Interest Payments on Student Loans

Most taxpayers who pay interest on student loans can take a tax deduction for the expense ? and you can do this regardless of whether you itemize tax deductions on your return. The rules for claiming the deduction are the same whether the interest payments were required or voluntary.

Add a Comment

*0 / 3000 Character Maximum