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Online Sales Changing the Tax Game
According to the National Retail Federation, Cyber Monday is expected to push online sales to $32 billion during the holiday season, up more than 10% from last year.
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.
WalletPop reports that 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.
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.
Photo by flickr.com.
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Beatrice Vaccaro on December 2nd, 2010 12:15 pm
Thank you for the informative article. As you correctly point out, when a consumer purchases online and the merchant does not collect sales tax at the time of the transaction, the consumer is responsible for self-reporting and remitting equivalent use tax. Understandably though, many consumers don’t keep track of every purchase and report them. It makes more sense for the seller to collect the tax, just as a bricks-and-mortar store does. Technology makes it easy for anyone to open a Web business, manage inventories, use target marketing, calculate shipping etc. Technology has solved this problem also. My company, FedTax.net, offers a service (called TaxCloud) that enables merchants to accurately calculate local sales tax. The service is completely free to merchants.
The Main Street Fairness Act now pending before Congress would mandate that all merchants collect sales tax. Unlike federal taxes (like income or estate taxes), sales taxes are LOCAL taxes that are voted upon directly or indirectly by local voters to pay for schools, police, and other local initiatives and priorities.
It is better that Congress address this issue so that all businesses collect the correct tax. Until then, more and more states are going to be attempting on their own to collect these taxes, which will 1) raise privacy concerns and 2) raise more fairness issues since not all consumers will be contacted to pay up.
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