It’s long been assumed that the internet eliminates all taxes for brick-and-mortar businesses. Online giants, however, are beginning to push back on this assumption by starting to charge sales tax in states where such a taxation system isn’t already present (with Amazon leading the way). The end result could be lower prices and more profit for consumers
The “how to avoid sales tax online” is a guide that will help you avoid sales tax when buying items from the internet. It also includes how to use coupons and discounts for your purchase.
Here’s the lowdown on Internet sales tax: who pays it, who doesn’t, and why it matters to state governments and physical stores.
It’s no secret that buyers despise paying sales taxes and relish a tax-free purchase. Consider the effectiveness of tax-free stores at airports in divorcing Bahamas-bound passengers from their Mai-Tai money. However, since a bar of tax-free designer soap requires an international boarding card, purchases from these outlets represent no danger to Main Street businesses or tax collectors.
The Internet has elevated tax-free shopping to a whole new level. In fact, no-tax shopping has become a popular enticement for internet merchants aiming to seduce customers into click-and-charge purchases. Despite popular belief, certain Internet transactions are subject to sales tax, and buyers are frequently responsible for remitting any unpaid sales tax on online purchases to their state directly.
Some states collect sales tax, while others do not. The buyer’s location, not the seller’s, determines whether or not the buyer must pay sales tax. If a company does not have a physical presence in a state, such as a shop or warehouse, it is not obligated to collect sales tax from consumers who live there. This link between sales and location is known as a “nexus” in legal terms, and it was established by the United States Supreme Court in Quill v. North Dakota, 504 U.S. 298. (1992).
Example Margo is enamored with exotic orchids. Unfortunately, she lives in a tiny Indiana town where her favorite types aren’t available at her local nursery. Margo instead purchases her orchid materials online from a company based in Vermont. The supplier’s whole operation is based in Vermont, and payments are collected there as well. Margo does not have to pay sales tax on her orchids in Indiana.
The supplier develops a warehouse in Indiana a few months later to handle all of its online orders for the whole nation. Margo still orders her orchids from the Vermont headquarters, but she now has to pay Indiana sales tax. Her trip on the tax-free train has come to an end.
There are several exceptions to the norm. Because they have formed distinct legal entities to conduct Internet commerce, many large merchants with local storefronts may sell their items tax-free over the Internet. To put it another way, the Barnes & Noble where you purchase a book online is not the same as the Barnes & Noble at the mall. Sales tax is not paid on online transactions since the online Barnes & Noble does not have a physical presence in your state. Thousands of brick-and-mortar merchants have expressed their displeasure with the practice of forming a distinct legal organization primarily to avoid paying sales taxes.
When a company’s online and physical organizations interact with customers, the problem gets considerably more complicated. For example, a customer may purchase tax-free golf clubs from Wal-Mart.com and return them to a nearby Wal-Mart shop. The question of whether such organizations are legally independent of one another has yet to be resolved in the courts.
It is your obligation to pay sales tax. If you reside in a state where sales tax is collected but do not pay it on an Internet transaction, you must still pay the tax to the state. When you pay it to the state directly, it’s called “use” tax rather than “sales” tax.
The sole difference between sales and use taxes is who pays the state: the vendor or the customer. In theory, usage taxes are essentially a back-up plan to ensure that the state gets paid for every taxable item bought inside its boundaries. However, since collecting use tax on smaller purchases is so inconvenient, governments have typically tried to collect it exclusively on large-ticket products that need a license, such as vehicles and boats.
Some states, such as Connecticut, Maine, Nebraska, New Jersey, and North Carolina, have since altered their minds and are ramping up attempts to collect usage taxes. However, most governments have been unable to pursue usage taxes due to bureaucracy, complicated tax regulations, and limited state resources. If the federal government maintains its prohibition on Internet e-commerce taxes, the collection of usage taxes may become a priority for state governments.
Future of the Internet as a tax-free zone It’s impossible to say if online transactions will continue to be tax-free. The Internet Tax Freedom Act (ITFA) was approved by Congress in 1998, and it imposed a three-year moratorium on taxing Internet access services at the state or municipal level. Small Internet Service Providers (ISPs), huge information portals such as Yahoo, and other websites and enterprises that offer connection and information, such as AOL, are all considered “Internet access services.”
There can’t be any additional sales or other taxes on Internet transactions because of the 1998 embargo. The current tax moratorium will be in effect until October 2001. This restriction, however, has no effect on your need to pay any sales or use taxes payable under earlier legislation.
Congress established a 19-member Advisory Commission on Electronic Commerce to research Internet taxation and report on April 21, 2000, in order to decide the future of Internet taxes. According to early reports from the Commission, it will suggest that Congress keep the Internet as a tax-free zone until 2006. In Congress, legislation based on these suggestions has already been presented.
State governments and brick-and-mortar shops, predictably, are vocal in their objections. The reason for this may be found in the statistics. Sales tax receipts presently total over $150 billion per year, accounting for almost one-third of all state income. These levies fund everything from schools and police to roads, parks, and other government services. States without a personal income tax, such as Texas, rely much more on sales tax revenue. (Alaska, Delaware, Montana, New Hampshire, and Oregon, which don’t have a sales tax, aren’t affected at all.) According to widely recognized Internet sales predictions, unpaid sales tax collections from online purchases might reach $10.8 billion by 2003.
Many Main Street merchants believe that enabling customers to avoid paying sales tax offers internet businesses an unfair competitive advantage, particularly in jurisdictions with high sales taxes. Large merchants whose Internet divisions enable tax-free sales yet allow online purchases to be returned to brick-and-mortar locations enrage them the most. Supporters of equal taxes for all retailers have voiced dissatisfaction with the Commission, believing that it does not fully reflect their interests and that its report to Congress would be prejudiced.
Project for a Streamlined Sales and Use Tax State governments banded together in 2002 to fight back. The Streamlined Sales & Use Tax Agreement (SSUTA), a state-led project, brought together 40 states and the District of Columbia to streamline their sales tax legislation in order to make sales tax collection simpler. The collection of sales tax is still optional under SSUTA. It is, nonetheless, seen as a crucial first step toward federal legislation.
The SSUTA is gaining popularity. Several major retailers have negotiated amnesty arrangements with member states in exchange for future sales tax collection, and more are anticipated to follow. Moreover, numerous states have already made changes to their tax legislation to comply with the SSUTA. With all of the pressure from states, many experts anticipate that you’ll be adding a few extra dollars to your shopping basket for state sales taxes in the coming years.
The Commission on Electronic Commerce website (http://www.ecommercecommission.org) has further information about Internet sales tax.
E-fairness (http://www.e-fairness.org), which represents store groups pushing Congress for equitable taxes, is another useful website. The Sales Tax Institute (http://www.salestaxinstitute.com) offers a variety of sales tax-related services and connections. The Streamlined Sales Tax Governing Board (http://www.streamlinedsalestax.org) keeps track of the organization’s progress on its website.
The “internet sales tax 2020” is a tax that will be implemented on internet sales. The tax is meant to help support the government and give it more money.
Frequently Asked Questions
Which states require sales tax for online sales?
A: The states that require sales tax for online purchases are the following, but not every state is listed. – Alaska – Connecticut – Delaware – Hawaii – Maine – Montana (some) – New Hampshire
What is the sales tax for online purchases?
A: The sales tax for online purchases is based on the state that you live in. In some states, the percentage ranges from 8-11% while other states range all of 2%.
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