Online Sales Tax Becoming A Reality

Posted by Don on September 6, 2012

Get ready to pay an online sales tax when shopping online! Congress is moving forward with the “Marketplace Fairness Tax” (H.R 3179, the Marketplace Equity Act of 2011).  If signed into law, it will require online retailers to collect a sales tax on your purchases made online at places like Amazon.

How Online Sales Work Now

To fully understand this “new” tax, we first have to understand the current state of online sales. Current law states that retailers only collect a sales tax if they have a physical location within a state and are selling merchandise to a resident of that state. For example, if ABC Widgets operates out of Ohio, and you buy a widget from them and live in Ohio, then ABC Widgets will charge you a sales tax on your online purchase. But, if I buy a widget online and live in Maine, I don’t get charged a sales tax. Taking this example one step further, if ABC Widgets decides to build a warehouse in Maine and I make an online purchase, then I will be charged a sales tax since they now have a physical presence in the state of Maine.

Notice that when ABC Widgets only had a presence in Ohio and I, living in Maine, made a purchase, they did not collect a sales tax from me. This does not mean I am not required to pay a sales tax. According to the law, I am still required to pay my state sales tax on my online purchases, and so are you. The only difference is that instead of the business collecting the tax and paying the state, I have to claim the tax myself. This is called a “use tax”.

Every April when you complete your state tax return, you are supposed to tally up all of the online purchases you made and apply your state sales tax to the total and pay that amount with your taxes. It wouldn’t surprise me if you didn’t. Most people don’t. Most people don’t even know about use tax! As a result, most people don’t pay the tax and it is difficult, if not impossible for the government to enforce. Therefore, the states lose out on much needed tax revenues.

How Online Sales Will Work Under The New Law

With the passing of this bill into law, it will require retailers to collect a sales tax from you, regardless if the retailer has a presence in your state or not. While this may appear to be a new tax, it really isn’t. You were supposed to be paying it all along, as pointed out above. It’s just an easier and more efficient way for the states to get the sales tax on purchases you made. Experts have crunched the numbers and have concluded that states will receive $23 billion dollars in sales taxes from this new law.

If you are a small business and are worried about the hassle of collecting sales tax, there are two exceptions to the bill:

  • Any business that does less than $1,000,000 of remote sales in the United States is not required to collect sales tax.
  • Any business that does less than $100,000 of remote sales in a given state is not required to collect sales tax.

(Note that in both cases, the word remote goes back to my example above of not having a physical presence in said state. Also, the dollar amounts can vary on a state by state basis. The numbers listed above are the maximum amount allowed to be exempt from the new law. Your state may settle for a lesser dollar amount. Finally, if you live in a state that does not charge a sales tax, this new law does not affect you.)

In essence, online retailers such as Amazon and Best Buy, will most likely be collecting sales taxes from you when you buy online. Other retailers, such as the Mom & Pop store that specialize in knitting, may be exempt if their sales do not meet the threshold.

Final Thoughts

Off-line retailers, or brick and mortar stores, have been saying that online retailers have an advantage because they do not have to collect sales taxes and therefore are able to offer lower prices. While the prices are lower online, it is not due to not collecting sales tax. They offer lower prices because they have less overhead expenses. In my state, I pay 6% sales tax. The prices I find for products online are much less than 6%. So even with me paying the sales tax, online shopping is still cheaper.

So the question I pose to you is this: will paying a sales tax change your online shopping habits at all? For me personally, I doubt it will. Adding my state sales tax to my Amazon order won’t stop me from shopping on Amazon, or any other online retailer for that matter. Even with the added tax, the prices are still cheaper. Plus, shopping online provides a better selection and I can shop from the comfort of my home.

Will you change your habits if sales taxes are added to your online purchases? Is there anyone out there that was paying the use tax on their state form?

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Comments to Online Sales Tax Becoming A Reality

  1. Even though I am working very hard to reduce expenses and start saving seriously, I doubt that it would change my purchasing habits. I make very few online purchases however, so the tax will have little impact. Many of my friends do most of their shopping online now and it might affect them.

    Charlotte@TheCCI

  2. I don’t shop online because it doesn’t charge sales tax – I shop online because it’s convenient and I can get better prices. The internet is inherently more competitive, because you can search for the same product on dozens of sites in the time it takes to go to just one physical location.

    Online stores will probably hide the sales tax by including it in the purchase price, so buyers likely won’t even notice. But that’s just a thought.

    TTabenske

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