- 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

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

Intro to Retirement

Get started early planning for your long term future.

View Course »

TurboTax Articles

Amending Your Income Tax Return

What if you've sent in your income tax return for a previous year and then discover you made a mistake? You can make things right by filing an amended tax return. And, don't think an amended return will automatically cost you money; it's perfectly okay to change a return to capture a tax break you missed the first time around.

How to File Taxes with IRS Form 1099-MISC

If you receive tax form 1099-MISC for services you provide to a client as an independent contractor and the annual payments you receive total $400 or more, you'll need to file your taxes a little differently than a taxpayer who only receives regular employment income reported on a W-2.

What If I Did Not File My State Taxes?

At the time of this writing, the only states that do not charge a state income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. If you live or earn money in one of the other 41 states or the District of Columbia, you may need to file a state income tax return by April 15. It is a separate and independent requirement from filing your federal tax return and failure to file it on time may result in interest and penalty charges.

Add a Comment

*0 / 3000 Character Maximum