If you live in a state that has a sales tax and you purchase items on the Internet that would normally be taxable in your state, you are responsible for paying the tax. If the online vendor does not charge you the sales tax, you must keep records of your purchases and pay the tax directly to the state. When you as the buyer pay the tax it is referred to as a “use” tax rather than a “sales” tax, which would be collected by the seller.
Many states now have a separate line on their state income tax forms to collect sales tax on Internet purchases you’ve made over the past year. You would need to keep records and report the sales tax when you file your annual state income tax return. Other procedures apply in states that do not have a state income tax. In Texas for example, if you have a sales tax permit and purchased goods on the Internet that are subject to use tax, you must report the purchases on line 3, “taxable purchases” of your Texas sales tax return. If you do not have a Texas sales tax permit, you would have to report your purchases on form 01-156, Texas Occasional Use Tax.
As indicated in Tax on Internet Sales by Nolo, some Internet sellers collect sales tax and some don’t. But the obligation to pay the sales tax is determined by the location of the buyer, not the seller. Based on a Supreme Court decision in Quill vs. North Dakota in 1992, if a business does not have a physical presence in a state, such as a store or warehouse, it is not required to collect sales tax from customers in that state. This decision involved a mail order company, but the same principal has been applied in practice to Internet sales. Therefore, an Internet seller may collect sales tax, but only in states where it has a physical presence. But this does not exempt you the buyer from your use tax obligation if you are located in some other state.
According to Bruce Bartlett, a senior fellow at the National Center for Policy Analysis, the rule for paying sales tax on Internet purchases is the same as it has been for decades on out-of-state and mail-order sales. In theory, use taxes apply on all these purchases, but in practice the states find it difficult to collect the taxes because they aren’t withheld by the seller. Customers must voluntarily remit the use taxes, but since the chances of being caught are so low, few people pay them.
States are stepping up their efforts to collect sales tax on Internet sales since there is a substantial amount of fiscal revenue at stake. And brick-and-mortar retailers want to eliminate what they consider to be an unfair advantage for online retailers who don’t charge sales tax.
One way the states are trying to collect these sales taxes is by fighting the physical presence rule, called “nexus” in legal terms. As reported by Steven Billmyer, effective June 1, 2008, the state of New York started requiring retailers to collect sales tax on Internet sales. New York did this by extending its definition of nexus to cover Internet retailers who have sales affiliates in the state who generate a combined total of $10,000 or more a year in revenues. Amazon, which does not have a physical presence in New York but does have affiliates, reacted by posting a notice on its website indicating to its customers that it was now required to collect New York sales tax for shipments after that date.
Big retailers also get around the requirement to collect sales tax on Internet sales by establishing separate legal entities whereby they do not charge sales tax on Internet sales even though they have a physical presence in the state. As reported by the Institute for Local Self-Reliance in Internet Sales Tax Fairness, in 2001 the California Board of Equalization ruled that Borders.com was not a separate entity but rather an online extension of the Borders Books & Music chain and therefore must collect sales tax on sales to California residents. Several states have amended their sales tax laws to establish that the e-commerce branches of national chains have nexus and therefore must collect sales tax.
State governments have also organized an initiative known as the Streamlined Sales & Use Tax Agreement, intended to simplify their sales tax codes in order to make sales tax collection easier. The Supreme Court decision in 1992 indicated that the collection of sales taxes in multiple taxing jurisdictions places an undue burden on retailers and would hamper interstate commerce. This initiative by the states is intended to override that argument.
Bruce Bartlett, “Internet Purchases Aren’t Exempt from Sales Tax” – National Center for Policy Analysis
Institute for Local Self-Reliance, “Internet Sales Tax Fairness” – newrules.org
Nolo, “Tax on Internet Sales” – Bplans.com
Saul Hansell, “Amazon Plays Dumb in Internet Sales Tax Debate” – The New York Times
Steven Billmyer, “Collection of sales tax on Internet purchases starts today” – Syracuse.com
“Texas Sales Tax Frequently Asked Questions” – Window on State Government, Texas Comptroller of Public Accounts