As a consumer and business leader, you’ve probably noticed how the Internet gave many businesses a way around costly sales taxes. Depending on your business type and career background, you might view this loophole differently. For Internet-based enterprises, it helps them cut costs for themselves and their consumers, but traditional brick-and-mortar establishments are calling, “No fair.” Regardless of where you stand, the government is beginning to learn how to regulate this new brand of sales tax, which means the Internet’s tax-free days are numbered.
Understanding the 1992 Supreme Court Decision
In 1992, the Supreme Court ruled that merchants did not need to collect sales tax for transactions made in states where they didn’t maintain a physical presence. For example, Taylor, who is living in California, wants to buy a customized pair of boots from Boots Unlimited, a company based in North Carolina. For her online transaction, she doesn’t have to pay North Carolina or California sales taxes. However, if the same company had a warehouse or store in California, she would have to pay California sales tax for the same boots.
In response to this ruling, some businesses created legal subsidiaries for their Internet sales for the purpose of circumventing the cost of sales tax. However, the Streamlined Sales Tax Project in conjunction with several state government lawsuits ended the practice.
Optional Sales and Use Taxes
If you live in a state that collects sales tax, you are required to pay a sales tax for all of your Internet purchase. When consumers are required to pay tax directly to the state government, it’s considered a “use tax.” Essentially the difference between sales tax and use tax is the seller pays sales tax and the consumer pays use tax. However, the tax is applied to the same transaction.
It’s easy to see how keeping track of all small purchases made online by state citizens is nearly impossible. For this reason, states only apply use tax to large purchases that require a special license, such as trucks, boats and cars. States like New York are taking steps to change this oversight with an income tax line dedicated to use tax on delivery, online and out-of-state sales. California isn’t far behind and is starting taxpayer education programs.
The Tax-Free Internet Has a Limited Future
Can the Internet maintain a safe space for tax-free transactions? In light of the 1992 ruling and the numbers, it seems unlikely. Nationally, the United States makes about $150 billion in sales tax revenue, which accounts for 1/3 of state revenue. Texas and other states without income tax rely on sales tax to an even higher extent.
What does this tax money go toward? Like all tax dollars, the revenue is directed toward state maintenance and improvement projects. The money goes toward public safety, recreational parks, educational services and other state funded programs. However, states such as Alaska, Delaware, Montana, New Hampshire and Oregon don’t have an existing sales tax and wouldn’t be affected either way.
SSUTA and Streamlined Sales Tax
The Streamlined Sales & Use Tax Agreement (SSUTA) is a state-led initiative involving a coalition of 40 states and Washington D.C. The coalition aims to collectively simplify sales tax codes, as well as the sales tax collection process. The agreement has gained some popularity and several states have already amended their sales tax regulations to align with SSUTA. Some national retailers have negotiated amnesty deals and more are expected to do the same.
Let’s get back to the question: do you have to pay sales tax for your Internet purchases? For the moment, you can save if you buy from companies with no physical location in your state. However, many experts agree that in the next few years, your Internet purchases will be subject to the same tax as your in-person transactions.
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