Tax on online sales?

An issue of interest to anyone who buys or intends to buy anything online concerns the proposed taxation of online commerce. State revenue-services departments across the country are frustrated by taxes they believe they are entitled to and not getting from online sales for items to be used in their jurisdiction. This is a use tax. Buy a book on Amazon.com. Read it in your respective states. State tax departments will soon say you owe them use tax for the use of that purchase in your own state.

Here’s an article from 2004 about this issue, another from 2005, and another from 2006, all from CNET News.

This is a tax most consumers have not dealt with or even known about, and if any of you plan to buy anything online, I advise you to educate yourselves about it. You might be liable for it and in violation with your state tax department if you ignore your liability. That is, if state tax departments are successful in their attempts to activate this previously arcane tax, which has suddenly gained in importance because of the burgeoning of online sales.

I have a particular familiarity with use tax because I am required to file and submit it along with my state (CT) sales tax annually. I am Sole Owner of a very small business and have had a CT tax number and filed annual tax submissions since 1990. The form I use is entitled “Form OS-114 Sales and Use Tax Return”. Very few categories of taxes on that 2-page form pertain to my business: primarily (1) Gross receipts from sales of goods; and (2) Use tax on purchases of goods/rentals/services by my business subject to use tax.

The use tax is a necessary part of running a business dealing in commodities and maintaining inventory. Among sales, virtually all are sold outside my state, even out-of-country because they are online sales. Out-of-state sales are listed on page two of my form. All the items on Page Two are subtracted from the Gross receipts from sales of goods because the state of CT says they are deductible. I dutifully charge 6% sales tax on CT sales (including online sales to CT residents). And my business is registered in one state, so I charge sales tax only in one state. Out-of-state sales tax is not collected on out-of-state sales in CT.

I have also conducted sales transactions for the Metropolitan Museum of Art in 2003 and 2004, so I know big business does likewise. The Met has outlets in several states, an online store, and catalog and telephone sales far and wide. Only in the states where they have actual retail outlets do they collect sales tax, according to the prevailing jurisdiction. In the rest of the states (during my term of employment that was 43 states), sales personnel were told not to consult our sales tax books, but to ship the out without any sales tax. Those 43 states were exempt for the Met. And a great deal of my time (at the Met) was spent packing and shipping purchases to those 43 states.

Knowing firsthand that sales tax is very particularly handled by both large and small businesses in this manner (at least in my experience, which includes a quintessentially big business — the largest tourist destination in New York City — and perhaps the smallest wholly owned business in the state of Connecticut, Works on Paper), I see no other means by states hungry for online tax collection than by the activation of the use tax, which has stood idle and is ripe to activate.

Here is where you come in:

You buy a textbook online at Amazon.com for a law course you are taking at ND Law School, because the ND bookstore has run out of copies. You use the book in Indiana (at ND). The value of the book is presumably what you paid for it. Amazon.com assessed no sales tax on the sale. If the states succeed in applying use tax in this way to online sales, you will need to document and pay to the State of Indiana an Indiana use tax for that book.

This is a developing legal issue of the Internet among all its nascent legalities. This one will be yours henceforth every time you go online to make a purchase anywhere online. If the states get what they want.

One more scenario, and this one is even less pleasant:

You buy a product online from a company registered and based in your state. You are charged your state’s sales tax on that purchase. But since you bought it online, there is also a use tax out there for you to pay. I’m sure there is a legal term for this, but I am an artist, not an attorney.

These scenarios are not currently playing out. My advice to any consumer is to watch the actions of the states in relation to this issue. It doesn’t exist now, but if it’s up to the states alone, it soon will. Please educate yourselves if you haven’t already done so. Please comment here and correct my stipulations if you have a better or divergent knowledge on taxation, business or interstate commerce.

And caveat emptor.

P.S. While I’m at it, I invite you to visit the following online stores:
http://members.ebay.com/aboutme/oldawnie
http://members.ebay.com/aboutme/oulmole
http://www.cafepress.com/khayele
http://www.cafepress.com/aglezeletey
http://www.cafepress.com/brendanloy

And maybe you should do this soon.

16 Responses to “Tax on online sales?”

  1. Anonymous says:

    Close the tag! Close the tag!

    For the love of God, close the tag!

  2. Brendan Loy says:

    The tag has been closed. :)

  3. Brendan Loy says:

    You buy a textbook online at Amazon.com for a law course you are taking at ND Law School, because the ND bookstore has run out of copies.

    Or because the copy at the ND bookstore is obscenely expensive… ;)

  4. Brian Foster says:

    “You buy a product online from a company registered and based in your state. You are charged your state’s sales tax on that purchase. But since you bought it online, there is also a use tax out there for you to pay. I’m sure there is a legal term for this, but I am an artist, not an attorney. ”

    I could be wrong, and of course it may vary from state to state, but I am almost certain that the sales and use taxes are complementary, that is to say, mutually exclusive. If you paid sales tax on a purchase, you owe no use tax, and vice versa.

    Moreover, technically you owe use tax (in Indiana at least) if you buy a product at an out-of-state brick-and-mortar retail establishment for use in Indiana, and the sales tax you paid to that state is less than the 6% sales tax you would have paid in Indiana. For example, if Ohio’s sales tax is 4% (I have no idea what it actually is), and you cross the border from Indiana to spend $1000 at a store in Ohio, then even though you were charged and dutifully paid your $40 Ohio sales tax, you still owe $20 more — but *only* $20 more — to Indiana in the form of use tax. Essentially, you get a use tax “credit” equivalent to the amount of out-of-state sales tax paid.

  5. Brian Foster says:

    Other random tidbits I happen to ahve accumulated:

    In Indiana, there’s a use-tax line on the state income tax form. You are asked to total up your purchases that you didn’t pay IN sales tax on, and given the opportunity to discount for out-of-state sales tax, and then you figure your use tax.

    In Michigan, the state income tax form also as a use-tax line, but they allow you to estimate your use tax based on your income, rather than making you pretend that you kept track of your actual purchases all year.

    I don’t think the use tax revival had really caught on yet when I was a Virginia taxpayer, so I can’t comment on that.

    Relatedly: I think it’s important as this debate evolves to be wary of the rhetoric. States are emphatically NOT trying to “tax the Internet.” As Leanna notes, the use tax has been on the books for a long time, but it was dormant because sales tax was adequate and there was very little out-of-state purchasing going on (other than mail-order companies and people who live at the borders crossing state lines). It’s entirely reasonable, in my view, for the states to revive this tax in an attempt to make up for the revenue they are losing to the extent that people now routinely order from Amazon instead of going to the mall or whatever. I’m as rabidly anti-tax as the next libertarian wing-nut :), and I hope this effort fails miserably, but I certainly cannot blame the states for trying, and disapprove of efforts to vilify them for it.

    (Note I am not saying that Leanna was trying to vilify them — my point is only that my brethren on the anti-tax right will try to be disingenuous on this issue, which is lamentable, because I think ultimately the best resolution is to repeal the use tax entirely, rather than try to twist it into a straw man to defeat this particular proposal.)

  6. Angrier and Angrier says:

    First, I think it is only fair to charge an Internet sales tax. Not doing so is unfair to local retailers who are trying to compete with Amazon, etc. Second, it is ridiculous to put all of the onus on consumers. You mean to tell me with all the sophistication of the Internet and business software that there isn’t a simple method by which a retailer like Amazon can collect a sales tax (make it a flat sales tax regardless of state) and cut checks to the States in which the ordering zip codes reside?

  7. Leanna Loomer says:

    A point I didn’t make but which is a propos pertains to definition of terms in relation to the nature of taxes.

    I submit tax as a businessperson on my SALES. That is sales tax.

    I submit tax as a businessperson on things I USE to run my business. That is use tax.

    Isn’t what the government is really talking about online untaxed SALES? Choosing the USE category rather than the SALE category is sloppy terminology and it’s going to make really sloppy law.

    I don’t stand on either side of this issue. I will also be a consumer in this debate, so I stand to lose as much money and time to shop online as the rest of you do. But couldn’t we keep our tax functions straight, and legislate them as what they really ARE?

    And incidentally, I for one don’t go online to avoid paying sales tax. I go there because I can find exactly what I want to buy, and with good search skills (and Google) I can find and purchase it in less time than it takes to find a parking space at the mall. Where I might or might not find anything even approximately what I want, and before the mall closes. The Internet has much better hours.

  8. dcl says:

    Personally I see a sales tax as a logical thing to exist and a use tax as totally stupid and arbitrary. Sales tax makes sense because the business being asked to assess it is using the services of the state / municipality that it is selling the product in–police fire etc. etc. Amazon is not. And I see no reason for me to pay Amazon’s taxes for them because my state happens to be annoyed that their taxies have made the business in their state less competitive. UPS, FEDEX etc pay a number of operational taxes in the states in which they operate and USPS is a pay for use semi government semi private service.

  9. Brian Foster says:

    “I submit tax as a businessperson on my SALES. That is sales tax.

    I submit tax as a businessperson on things I USE to run my business. That is use tax.”

    I’ve never paid, and know little about, small business taxes, so I have no basis for disagreement here.

    From the perspective of the individual consumer / taxpayer though, I remain fairly certain that we pay sales tax at the point of sale, i.e. when we buy something. If we buy something (i.e. are party to a sale) and there is no sales tax collected on transaction, then our state of domicile nonetheless expects to collect a tax for our use of that purchases product in-state. The use tax just happens to be equal to the sales tax and calculated the same way.

    Whether that’s the same or different from the small-business tax realm, I know not. :)

    Actually, Leanna, I do have a question regarding your business taxes — are you really paying tax on your SALES of goods and your USE of business property? Or are you paying tax on your INCOME/PROFIT from sales and PROPERTY tax on your property held for business/investment purposes?

    I ask because I recall my former employers in DC having to annually tally up the value of computers, desks, etc. in the office because they had to report in their taxes (with proper depreciation and all that). But it was always characterized as a property tax, not a use tax. Hence my curiosity.

  10. Leanna Loomer says:

    My point about terms is not, or only in part, a matter of semantics. If use tax is made to compensate for lost sales tax revenues, then it is a compensatory sales tax. Let sales tax wear its own name. That is the logical hook into online (ahem!) sales.

    To answer your question, Brian, I no longer have rent, because I closed the studio this past summer and work from home. I need a fax machine, and that really is USE. And I charge bona fide CT sales tax, and that goes right on to the state of CT DRS. For me, both taxes really are what they say they are.

    But I like your question. I hope you will add it to the larger debate that is picking up steam.

  11. Leanna Loomer says:

    And as to point of sale: When I sell an item retail and it is subject to sales tax, I am the point of sale. When I wholesale my merchandise to another retailer, they are the point of sale. When my printer takes my money and gives me my card order (to replenish my inventory) there is no point of sale. The point of sale is the moment when a taxable item and compensation for it are exchanged. If the tax laws go as the states seem to want, the point of sale on eBay will be the keystroke that registers a winning bid. All I do is the paperwork and the cash transfer.

  12. David K. says:

    The state of Oregon does not have a sales tax, they have an income tax. If an Oregon resident comes to Washington and buys something, they can show an Oregon drivers license and not have to pay sales tax. Meanwhile the store documents this, sends it to the government for the State of Washington who in turn recieves the amount of the sales tax from the State of Oregon out of their income tax revenues. Makes sense to me.

    Also interesting, there are some online stores who charge you the state sales tax based on your credit card’s billing address, however as Leanna points out i believe they only do this in states they have a physical presence in that state, i know Apple does even if you order online.

  13. atmchick says:

    Brian – I believe I may be able to clear up something about Leanna’s business taxes. This is based on my very small business in Texas.

    When I sell a product, I charge a sales tax. When I purchase a fax machine, I buy it tax-free (using my state tax id) just as I buy my supplies with which I create my product. At the end of the year, I pay the sales tax on my sales, the use tax for anything I bought tax-free that year but used in my business or used to create a product that I gave away (to myself, of course), and a property tax on any items that I currently use in my business, as well as my accumulated inventory.

  14. Brian Foster says:

    David,

    That doesn’t make sense to me at all, at least not if I’m looking at it from Oregon’s perspective.

    Oregon has chosen to structure their tax base entirely on an income tax, to the exclusion of a sales tax. (Setting aside other taxes for the moment, obviously.) That’s a perfectly valid choice for them. Washington, meanwhile, has a sales tax. Also fine.

    If an Oregonian, who could make a purchase in-state without paying sales tax, instead chooses to cross the border into Washington to make the purchase, why should Oregon subsidize that choice out of its own coffers?

    It works out well for Washington, of course, since they get their sales tax revenue either way. But it seems pretty crazy for Oregon to be willing to pay the sales tax for its residents who choose to shop in Washington. Why wouldn’t Oregon want to encourage these people to shop locally, thereby benefiting Oregon businesses? Instead, Washington businesses get the income, AND Oregon loses tax dollars because they’re sending a check to Washington.

    It would be better, I think, for Washington to charge sales tax on every sale in Washington, regardless of the purchaser’s state of residence. If an Oregonian wants to shop in Washington badly enough to pay WA sales tax, great. If not, she can stay in-state.

    For much of my life, I lived in Michigan, with 4% sales tax, right near the Indiana border, which had 5% sales tax. I always hated, in principle, paying that extra penny on the dollar when I went to the mall in South Bend. Then in 1994, Michigan raised its sales tax to 6%, at which point I tried to all my shopping in Indiana. Now they’re both at 6%, so it doesn’t matter. :)

  15. Brian Foster says:

    atmchick —

    Thanks, that does help my understanding. I guess my confusion was/is on the point of whether a merchant “pays” sales tax on their goods sold in the sense that he is being assessed a separate and independent tax on those sales, or if he is merely “passing on” the sales tax collected at the point of sale (assuming a point of sale existed and sales tax was collected from the purchaser :) ).

    Seems to me a small business owner has to pay:

    Income tax on their net biz profits;

    Sales tax collected from their customers;

    Property tax on whatever biz property is subject to it (cars, real estate, office equipment, etc.)

    Use tax on whatever biz property is “used” in the biz under the state’s use tax regime

    And whatever other taxes may apply, in terms of payroll and workman’s comp and whatnot

    Sounds like the “sales tax” a biz pays is just passing on what was or should ahv ebeen collected. Especially since you can purchase items for use in your own business tax-free. Right?

  16. Judy says:

    Okay.. I had to enter a website so I entered the one with whom I have an issue.. I am merely a consumer, not a retail outfit.

    I live in Oregon (no sales tax here).. anything I order from http://www.zazzle.com that ships to me is not taxed.. but god forbid, should I purchase here (as usual) and ship, say, to my grandchild in CA I am taxed. Now the retailer is NOT in CA, nor am I.. and the purchase was made in a sales-tax-free state, Oregon.

    What am I not understanding? How come CA gets sales tax for an item sold out of state through a retailer not located in CA???