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Internet Sales Tax Confusion. Myths or Misperceptions?

author photo of Sylvia F. Dion

If you’ve been following my posts, you know that my focus area for the SalesTaxSupport.com blog is e-Commerce and Internet Sales Taxes. This is, without a doubt, a contentious topic! With many states either introducing "Internet Sales Tax" legislation or enacting “Amazon Laws”, and now with the U.S. Congress introducing Federal Main Street Fairness legislation, there’s never a lack of developments in this area!

But instead of touching on recent developments, I thought I’d write a post on some of the misperceptions surrounding “Internet Sales Taxes”. I thought about writing on this topic for a couple for reasons. Firstly, I touched on one such misperception in my last post, “Main Street Fairness Act. Is SST the Silver Bullet?” - the misperception that The Internet Tax Freedom Act is the reason sales tax isn’t charged on all internet sales. (This is not why!) This got me to thinking about other internet sales tax misperceptions.

Secondly, in my quest to stay abreast of state tax developments and in my role of pseudo-journalist, I research, read and scrutinize an inordinate amount of information. I often come across articles and contributions that are excellent, informative and accurate. I also often come across writings that are slanted, inaccurate and so misleading they are sadly humorous! This is especially the case when it comes to the media's coverage of a State's “Amazon Law” or on whether sales tax should be charged on all internet sales. So, I thought a post addressing a few more of these misperceptions might be helpful. And while I realize that many of you are knowledgeable sales tax professionals who are fully aware of how slanted or incorrect the media’s coverage can be, I’ve seen or heard all too often, comments that lead me to believe much of the public remains misinformed.

So on to more misperceptions surrounding Internet Sales Taxes!

Mega On-Line Retailers like Amazon.com and Overstock.com Should Pay Their Fair Share!

Here’s one I’m sure you’ve read in the news, or even overheard in discussions. There’s a misperception that Internet Sales Tax Laws, e.g., the “Amazon Laws”, are a way to “stick it to the big guys” and force them to pay more in taxes. These laws do not impose taxes on mega on-line retailers; they’re not a means to force mega on-line retailers like Amazon and Overstock to pay “their fair share”. They’re a means to assert an expanded concept of nexus on out-of-state retailers that engage in activities described in these laws (generally web-linking) and require them to charge and remit the sales tax they collect to the state or local government to which that tax belongs. Why do some people think “Amazon Laws” are intended to tax on-line retailers? I believe it’s either because the media has it wrong (and reports it incorrectly) or, in their quest to grab readers attention, the media makes claims that just add to the general public’s confusion. Just look at the headlines and you’ll often find ones that read something like this; “Amazon Should Pay Its Fair Share in Sales Tax” or “Tell Amazon to Follow the Law and Pay Its Fair Share”. (By the way, these are real headlines.) Look at the comments readers post to these articles, and you’ll also see comments which support that this misperception exists.

Internet Sales Tax Laws Only Impact Mega-Retailers!

This misperception ties in with the first one above and centers around the myth that only the mega-online retailers are impacted by Internet Sales Tax legislation. But any type of legislation, whether it be a State "Amazon Law", or Federal "Main Street Fairness" legislation has the potential to impact businesses of varying sizes. And while the proposed "Main Street Fairness" legislation would exempt "small sellers", as defined in the Streamlined Sales and Use Tax Agreement ("SSUTA"), from its collection requirement, a State's "Internet Sales Tax" law might not provide for any type of small seller exception. This means that many small on-line businesses, some of which operate out of their home, could be required to comply with these state laws.

Purchases Made on the Internet are NOT Tax Free

Perhaps one of the biggest misperceptions is that purchases made on-line are “tax free”. Here’s a statement we’ve all heard (and maybe have even made ourselves), “I’ll just buy it on the internet and save on sales tax”. The reality is, if merchandise purchased on-line is considered taxable in the state in which the purchaser resides, and the on-line retailer did not charge sales tax on the transaction, a tax is still owed to the state. And the purchaser, the ultimate consumer, is the party responsible for voluntarily remitting the use tax to their state. The only purchasers who are truly able to make purchases over the internet “tax free” are those that are residents of, or businesses that are located in, one of the few states that do not impose a sales tax; Alaska, Delaware, Montana, New Hampshire, and Oregon.

I’m Supposed to a Pay a “Use” Tax? I’ve Never Heard This Before!

This one ties in to the misperception that internet sales are "tax free", and isn't so much a misperception itself, but an unrealized requirement. I’ve often seen comments which lead me to believe that some folks do not realize that their state requires them to voluntarily pay a use tax on those “tax-free” internet purchases. These comments take the flavor of, “I’m supposed to pay a use tax? That’s news to me” or “I don’t know how (or where or when) to report my use tax”. I will say that in the last year, I’ve seen more states take action to educate or encourage the reporting and payment of use tax by both individuals and businesses. For instance, earlier this year, Ohio launched its Use Tax Education Program, a combination amnesty/education program designed to help businesses understand what the use tax is and when a business must remit it. Many of the state tax amnesty programs in the last couple of years have also included information in their amnesty documents and websites that clearly stated that their amnesty programs were intended to cover unreported use tax liabilities. However, despite improved state efforts to educate taxpayers, there are still many purchasers who don’t totally understand how and where to report their use tax liability, which is why many states find it easier to require sellers to collect the sales tax at the time of transaction.

So where and when is use tax reported and paid? Most states that impose a personal income tax include a line or section on their individual tax return form for residents to report their use tax liability, which is paid along with their personal income tax. States that do not impose a personal income tax generally have a separate form for residents to report and pay their annual use tax. Businesses that are registered for sales tax collection purposes, will generally report any business use tax owed (on purchases made by the businesses) on their state’s sales & use tax return. Most states also have a separate form for businesses that do not have a sales tax collection responsibility, but make purchases on which use tax is owed. Keep in mind, that these are general guidelines.

Final Thoughts

There you have it, a few of the misperceptions about “Internet Sales Taxes”, with a little extra guidance on the use tax thrown in. Certainly, there are more misperceptions, but we’ll leave those for another day. For now, the next time you hear someone voice one of these misperceptions, you’ll be armed and ready to educate them.

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Missed my last post? Catch it here, Main Street Fairness Act. Is SST the Silver Bullet?

What’s up next? An Overview of Affiliate Marketing and How “Amazon Laws” Affect Small-Medium Businesses, More Updates on States "Amazon Laws" (exact titles TBD)

About the Author: Sylvia F. Dion, MPA, CPA, is the Founder and Managing Partner of SALT Consulting firm, PrietoDion Consulting Partners LLC. Sylvia has been covering Internet Sales Tax developments for SalesTaxSupport’s Issues blog since 2011. Sylvia is also the “U.S. Sales Tax for Foreign Sellers” contributor for SalesTaxSupport’s Industry blog and the “Massachusetts Sales Tax” contributor for SalesTaxSupport’s State blog. You can follow Sylvia on twitter and on Google+ and can contact Sylvia via e-mail at sylviadion@verizon.net or at 978-846-1641.

Other recent “Internet Tax / E-Commerce” posts by Sylvia F. Dion, CPA:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

4 Responses to Internet Sales Tax Confusion. Myths or Misperceptions?

  • Posted by RAJIV on October 31, 2016 6:30pm:

    Hi,
    I have S-Scop registered in CA, USA and planning to do online subscription based business in UK. No physical product shipped.
    Questions:
    1. Do I need to pay any kind of Tax to UK?
    2. Do I need to pay any Tax in USA?

    Thanks
    Rajiv

    • Posted by Author photo of Sylvia F. DionSylvia Dion on November 26, 2016 2:27pm:

      Rajiv,
      Thank you for your question/comment.

      If you have an S-Corp that was formed/incorporated in California, then you must file a U.S Corporate Tax Return (Form 1120-S) and MAY need to pay U.S. taxes (this is because the California S Corporation is considered a U.S. taxpayer). Whether you need to pay tax in the U.K. is a complex topic which I cannot answer based on the information you provided. However, I do offer fee based tax consultation to businesses that desire advice on international tax issues such as yours. Also, you may find my blog section on U.S. Sales Tax for Foreign Sellers helpful: http://www.salestaxsupport.com/blogs/industry/us-sales-tax-for-foreign-sellers/

      Kind regards,
      Sylvia

  • Posted by Michelle on August 16, 2014 4:52am:

    Question:
    Say you have a online only business locate and Incorporate in Delaware. I know the products I purchase from wholesalers that I retail/sell are not taxed when customers who live in other states purchase those products. The question is: I am also drop shipping items from wholesalers and artisans. For example: the wholesaler/artisan drop shipper is located in a Georgia that charges sales tax. The customer purchases the item on my web site yet the product it being shipped by wholesaler/artisan out of Georgia. Do I have to charge the customers a sales tax for those who live Georgia because the wholesaler/artisan is located in Gerorge and the purchased product on my website it's being shipped from Georgia?

  • Posted by self on September 30, 2011 9:01am:

    I own an e-commerce store and I think the whole concept of an internet sales tax is ridiculous. Brick and mortar businesses say its needed to “even the playing field”. In reality the playing field is already even, with the addition of a sales tax it tilts to the brick and mortar stores favor. The reason…shipping costs. The money that on line shoppers save in sales taxes, they end up spending on shipping. Now they have to pay both online sales tax and shipping cost. This is a clear advantage for brick and mortar stores. I’m glad most shoppers don’t know about internet taxes or refuse to pay them, however I worry that at some point the Gov. may try to force e-commerce stores to collect it for them.

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