Internet Sales Keeping Pace with Brick and Mortar

Internet sales keeping pace with local brick-and-mortar sales so far this year

Preliminary data show internet sales keeping pace with local brick-and-mortar sales so far this year. With this much revenue on the line, states are scrambling to inform the cyber-consumer about Use taxes due on internet purchases.  To date, Use tax compliance has been, to put it mildly, not good.

Whether or not states have special internet sales legislation on the books, most states require the payment of use tax on any untaxed purchase, including those made over the internet or from out-of-state vendors.

What is consumer Use tax?

Use tax is due on any taxable tangible product purchased by non-tax-exempt entities when no sales tax was collected at the time of purchase, regardless of where the item was purchased. This includes items purchased over the internet or from out-of-state sources including Amazon, eBay and others.

States scramble to get a cut of online shopping taxes

States have identified unpaid use tax as a significant loss of revenue during a time when budgets are stretched to the breaking limit. An estimate by the Streamlined Sales And Use Tax group claim $20 billion a year is being lost.

Identifying the problem and figuring out what to do about it are two different things. Most states have been at a loss as to a practical remedy. Some have included a self-reporting section on the state income tax return. Other states rely on press releases, news coverage and guilt. None of these methods have so far show much effect on compliance with some sources saying as little as 20% of these taxes are collected.

The Main Street Fairness Act

Federal legislation is being closely examined by both the senate and house to try to come up with a “fair” solution to this uncollected tax problem.

The Main Street Fairness Act, which has failed in previous years, was introduced this year by Sen. Richard Durbin (D-IL) and is currently being reviewed by the Senate Committee on Finance. The bill proposes to promote the simplification, administration and collection of sales and use taxes.

Unfortunately, like most of the issues involved with taxes, this one seems to have little chance of resolution before the year’s end. You can track the bill’s progress at

Simplified use tax could cause sales to be double taxed

For an item so nice, would you like to pay for it twice?

Simplified use tax

Simplified use tax

Collection of sales and use tax has become serious business. So serious, in fact, that there have been several highly publicized cases recently where federal lawmakers or individual states have attempted to force online retailers to collect tax on some, if not all, of their out-of-state sales.  The need for a simplified use tax seems to be growing.

Many editorialists, battling back and forth on the merits of an “internet tax,” are forgetting that states already have a method for getting their “fair share” of tax on out-of-state sales. It’s called use tax.

Unlike sales tax, which is collected and remitted by a retailer, use taxes are the responsibility of the purchaser and are due any time sales tax is not collected. All but a handful of states lay claim to it. The problem with use tax, as states see it, is that few individuals understand it, even fewer pay it, and it’s difficult to enforcing its collection.

Almost half of the states have recently included an entry on individual income tax returns where taxpayers can voluntarily calculate an amount for use tax liability. Still, very few individuals have proved willing to save a year’s worth of online receipts and pay their use taxes this way.

Many states are now allowing residents access to a simplified use tax lookup chart in the hopes that it will increase compliance.

The use tax chart is intended to make it easier for residents to meet their non-business related use tax obligation by providing them with a set figure based on adjusted gross income (AGI). For instance, Californians filing their 2011 state income tax with an AGI of between $150,000 to $199,999 will be allowed to enter $123. This chart can be used as long as any single item purchased cost less than $1,000 and the filer isn’t required to have a Consumer Use Tax account.

California has a vested interest in making use tax as easy as possible to pay. The Board of Equalization estimates about $1.1 billion in use taxes go unpaid each year. The state has been struggling with record budget shortfalls and it is estimate more than $10 million in additional use tax will be collected this year.

On the surface, this sounds like a great idea. Income tax filers are provided a simple figure to enter on their tax forms, saving them time and the hassle of collecting and calculating totals from individual receipts and e-mails for every out-of-state purchase they’ve made over the last year.

While “simple” is tempting, some individuals may find they are paying use tax on an item that sales tax has already been collected on.

Many states are filling budget holes by widening the taxpayer base.

Once, a business only had to collect and remit state sales taxes if they had a physical presence in that state – also known as nexus. Increasingly, states such as New York and California have redefined what constitutes nexus to include affiliate marketing.

California recently passed a law saying that any company advertising products on an in-state based web site, and paying said affiliate a commission, constituted nexus. A very public battle ensued between the state of California and resulting in the company vowing to terminate all affiliate programs within the state rather than collect the sales taxes.

Needless to say, California’s lawmakers understood what a huge economic blow that would be, and the lawsuit ended in a settlement which temporarily allows Amazon to retain their existing affiliates as is, with an ill-defined promise to begin collecting state sales tax at a later date.

It is already difficult for a consumer to predetermine whether an online retailer has a physical presence in their state. With ever-changing definitions of nexus, as well as inconsistent court rulings on the subject, it will be basically impossible. More and more online retailers will give in to the inevitability of having to collect sales taxes, and will start quietly adding tax on every sale. It will be easier and easier for purchasers to forget or misunderstand that they have already paid tax on internet purchases and that use tax is not required on those sales.

Until online retailers have a more clear set of rules to go by, you might find it is worth your while to hold on to those receipts and do the calculation yourself rather than fall back on the oh-so-simple state-calculated use tax chart.

What is this thing called Use Tax?

Use Tax

What is this thing called Use Tax?

What is Use Tax?

Use tax is a type of sales tax on imposed on purchases made outside a home state when sales tax has not been paid. Goods are subject to either sales tax, but not both. Use tax, unlike sales tax, is due at the rate where the purchaser first uses the article, not where the sale takes place. Sales tax may also be due on any freight, delivery, or shipping charges paid to the seller.

When Is Use Tax Due On Purchases

Goods are purchased in another state that does not have a sales tax or a state with a sales tax lower than the state the purchaser is in.  For example, items purchase in Oregon that are used in Washington are subject to sales tax.

Goods are purchased from someone who is not authorized to collect sales tax.  For example, purchases of furniture from an individual through a newspaper classified ad or a purchase of artwork from an individual collector.

Use Tax Facts

Use tax is due on Internet purchases when sales tax is not

Goods are purchased out of state by subscription, through the Internet, or from a mail order catalog company that does not collect tax at the time of the transaction.

Personal property is acquired with the purchase of real property.

Not All Sales Tax Derives from Sales

There are also internal transactions a company might initiate that will trigger use tax consequences.

For example, ABC Furniture Company buys its inventory tax-free with a resale certificate, then charges sales tax to its customers. But if this company removes furniture from inventory for use in the retail store by its sales staff, it has triggered a tax incident: use tax is due on the converted inventory that is being used, not sold. The states differ in the tax basis of such a transaction: some tax [cost], others [cost + overhead], and still others [cost + overhead + markup].

Level Playing Field?

States claim that use tax puts in-state retailers on a level playing field with remote sellers. But, while a brick-and-mortar store only has to deal with the sales tax laws of its own location, remote sellers have to deal with the sales tax laws of many jurisdictions – up to every U.S. state and locality that assesses them, if the company has a presence or “nexus” in every state.

To complicate matters even further, both states and the federal government have recently suggested expanding the definition of nexus in the hopes of generating more tax revenues. As unlikely as a nation-wide sales tax – something like the Value Added Tax (VAT) Europe uses – might have seemed a few years ago, the possibility grows higher as the recession drags on.

Does your state charge Sales Tax?

Currently, every state that imposes a general sales tax also imposes a sales tax. That includes 45 states plus the District of Columbia.  The five states without general sales taxes are: Alaska, Delaware, Montana, New Hampshire and Oregon.  Visit our Sales and Use Tax Rates By State for updated rates.


Charles F. Spielmann

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