Out of State Internet Sales Tax Law

Some purchases made on the Internet may not be subject to sales tax.

Many businesses are attracted to online retail due to lack of taxation on Internet purchases. However, in many cases businesses are still responsible for collecting sales tax, depending upon the business' physical location. In some cases the consumer, rather than the retailer, is responsible for paying taxes.

Physical Presence of Business

If an online retailer has a physical location it may be required to collect sales tax, depending on which state the business is located. If the business owns a store, office or warehouse in a particular state it is subject to that state's sales tax laws and must collect sales tax from the customers in that state, according to Nolo. However, customers from out of state can make purchases that are not subject to that state's tax laws.

Consumer Responsibility

If a consumer lives in a sales tax collecting state, he or she is required to pay tax even when the Internet retailer does not collect it. When the buyer is required to pay the tax, it is referred to as a use tax. In the past, states did not bother to attempt use tax collection on small purchases. Instead, they concentrated on larger purchases that require a license, such as cars and boats. However, many states are beginning to make more of an effort to collect use tax. New York has added a line to income tax returns pertaining to Internet, mail order or out-of-state purchases.

Impact of Tax-Free Internet

State governments and brick-and-mortar businesses are seeking to overturn a 1992 Supreme Court ruling that relieved Internet retailers from collecting sales tax for out-of-state purchases. Sales taxes are an important part of state revenue and account for approximately $150 billion annually, according to Nolo. Sales tax revenue is critical for states lacking a personal income tax, such as Texas.

Streamlined Sales and Use Tax Project

Forty states and the District of Columbia agreed to simplify their sales tax codes in 2002. This initiative is known as the Streamlined Sales and Use Tax Agreement (SSUTA), which aimed to make sales tax collection easier, according to Nolo. However, enforcement still remains voluntary.

References

• Nolo: When Sales Tax Must Be Charged for Online Purchases