Is the Internet A Tax-Free Zone?
Most people don’t want to pay taxes when they purchase goods online. Surprised? Didn’t think so. But individual states DO want you to pay tax on internet purchases to even out competition with brick and mortar stores and for obvious revenue reasons—sales tax pays for many valuable public services states rely on revenue from sales taxes to help fund basic services and initiatives, such as public safety, education, and recreation. If you use these state services (and we hope you do), you’ll win either way. But how do you go about imposing sales tax in the complexity of online shopping? That’s where the issue becomes a quagmire.
Look for 2017 to bring new energy to this ongoing debate. The debate centers on whether states should have the right to make out-of-state retailers collect their sales taxes. Currently states don’t have the authority to tax sales by remote retailers that lack a substantial nexus (physical presence) in the state. In the absence of firm federal legislation, states seldom see tax revenue from out-of-state sellers.
Pay Your Sales Tax
How do you know if you are stretching the sales tax laws from a consumer perspective? Answer these questions for yourself:
- Does your state require internet sales tax? Click here for a 50-State Guide to State Laws. Also watch for changes at a federal level.
- Know your nexus. Does the entity you’re buying from have a brick and mortar location (warehouse, office, store, or distributor) in your state? Does your state charge tax based on origin or destination?
- Did the retailor fail to collect taxes from you at the time of purchase?
- If not, does your purchase require a “use” tax? The answer is probably yes.
If you answered yes to any of these questions, then you technically required to declare the tax you should have paid on purchased items when you file your taxes at the end of the year. This might seem trivial if you’re buying, say, a t-shirt, but gets gnarly really quick when you start purchasing big-ticket items like jewelry, cars, or furniture.
Of course, the reality is that most consumers don’t pay these use taxes. Most states don’t have the mechanisms in place to collect the tax, but you should know that for states that require sales tax, online retailers are misleading taxpayers and putting you at risk of tax fraud by failing to collect the sales tax or advising you to make sure to pay it. Well, now you know.
When you’re researching more about online sales tax and how it will play out in 2017, keep your eye on The Marketplace Fairness Act. The goal of the Marketplace Fairness Act is to simplify collecting taxes online and grant states the authority to compel online retailers to collect sales tax at the time of a transaction—exactly like local retailers do. For example, Amazon collects sales tax in 24 states and according to the Marketplace Fairness Act website, is now allied with supporters of the bill.
The Marketplace Fairness Act encourages uniformity and allows states to collect taxes that in many cases are already owed. Yet the debate is so heated that passage into law could be tough. Still, paying tax may soon be inevitable. And as a consumer, you aren’t necessarily paying more for an item by paying the tax; it’s what you would expect to pay if they were purchasing anything in their state.
Generally, sales taxes can’t really be avoided. And because “a purchase is a purchase,” regardless of how heated the debate over online sales tax gets, the days of tax-free internet purchases are likely numbered.
Build Tax-Free Wealth
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