Internet Sales Tax

When we go shopping at the local retailers near our homes, most of us hardly notice the sales tax we pay as a part of the purchase price.  Whether we are buying anything from computers to socks (but not most food items), we are taxed on the purchase.

What I didn't make clear, and worth mentioning...

What is Sales Tax?

Sales tax is a tax placed on the sale of goods.  Sales tax is generally composed of percentages defined by both the state we live in as well as the city where the sales transaction occurs.  Just as each state can set the amount of sales tax it charges, each city within that state can set a tax rate within reason.  As a result, sales tax can range from roughly 3% to as high as around 11%.  This difference in tax rates charged by different states and cities is why we may save a few bucks when we choose to buy something in one city as opposed to another.

Designed to be Local

Sale tax is based on the physical presence of a business in a given area or state.  This was defined most recently by a Supreme Court decision in 1992, stating that mail order businesses did not have to charge sales tax if they did not have a physical presence in the state where the purchase occurs.

When this Supreme Court ruling was made, consumer purchases were rarely made through a business outside of their state (much less even outside of their city, for that matter).  Many people like to see the products they are purchasing before they buy, so purchasing at local stores was king.  While mail order did exist, it accounted for a small minority of purchases.  And a good portion of the mail order that did exist related to catalog businesses of stores that had a local physical presence in a given marketplace.  Therefore, sales tax applied to purchases through those businesses.

As a whole, in 1992, little in the way of sales tax dollars was lost by local businesses because of mail order purchases.

The Times Are Changing

However, the retailer landscape has shifted dramatically in the past 10 to 15 years.  With the growth and availability of the Internet, the ability for a consumer to easily purchase something online and have it delivered to their door as grown exponentially.  This growth has had an impact on local retailers and jurisdictions.

Local retailers have to charge you sales tax.  As  more and more consumers flock to online purchasing, they have learned that purchasing online can save them money because a product that is priced the same locally and online will in the end cost the consumer less when purchased online because of the lack of a sales tax charge.

Online purchases have hurt local retailers, as more and more of their business has shifted online.  This loss of local sales has also hurt cities and states, as the lost local sales translate to lower sales tax dollars received for those jurisdictions.

Few people realize that even though companies are not required to charge sales tax to consumers who make purchases from states where the company does not have a physical presence, we are supposed to pay the sales tax to our state anyway.  Historically states have not enforced this payment of sales tax.  But this is starting to change as the amount of lost sales taxes become more significant.

States are starting to develop education programs to make people aware they are supposed to be paying sales tax on Internet purchases.  Some states are adding sections to their state income tax forms where people have to calculate and pay the Internet sales tax they owe.  Federal legislation may soon surface as well to drive a consistent requirement for the payment of sales tax for online purchases, with the thought that it will level the sales tax playing field between Internet and brick and mortar businesses, thus helping local jurisdictions receive the sales tax they are owed.

by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.