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Internet Sales Tax: State Deals with Amazon Bring Up Questions of Who Should Pay

In September 2011, Amazon reached a deal with the State of California, which had been trying to get the retailer to collect sales tax on items shipped to the state. The agreement is that Amazon will start collecting sales tax in a year. Other states are making similar demands of Amazon, including Tennessee, which will require Amazon to begin collecting sales tax in 2014, and South Carolina is giving Amazon five years before it has to begin collecting sales tax [3] on products bought by residents.

Of course, all of this could become moot if Congress gets involved — which is what many retailers want. Many retailers, from small mom and pop shops to retail giants like WalMart, want online retailers to begin collecting sales tax, since being sales-tax-free is yet another advantage that online sellers have over their brick-and-mortar counterparts. All of this talk of Amazon, Internet sales tax and possible Federal involvement has many wondering what the rules are for Internet sales tax.

Who Has to Collect Internet Sales Tax?

Back in 1992, the Supreme Court ruled that mail-order retailers weren’t required to collect sales tax in states where they don’t have a physical presence. Online retailers took this to apply to them as well. So, if you buy something from an online store that doesn’t have a brick-and-mortar presence in your state, that store doesn’t have to collect sales tax to send along to your state. Some states are part of an alliance, the Streamlined Sales & Use Tax Project, that have made it easier to collect sales tax from merchants — and consumers, and many retailers collect sales tax as a result (even though they don’t have to in the strictest sense).

Of course, if you buy something online from someone with a physical presence in your state, you do have to pay sales tax on it. Right now, it’s the physical presence that matters (unless you live in a state that has an agreement with Amazon, and other other retailers, to collect sales tax).

Paying a Use Tax on Items You Buy from Out of State Sellers

Of course, sales tax is a big source of revenue for most states, and they don’t want to miss out on that just because you are buying items out of state. Just because the merchants aren’t required to collect sales tax doesn’t mean that you aren’t supposed to pay it. When a consumer reports the sales tax he or she should have paid on out of state items, it’s called a use tax. You will notice, on some state income tax forms, that there is a line for you to list what you owe so you can pay it.

Bottom Line

States want revenue from taxes related to online sales, and they are beginning to crack down — especially as online shopping [4] grows in popularity. States know that it is tough to get individuals to report their online purchases and pay the use tax, so they are concentrating on big online retailers, and even hoping that the 1992 Supreme Court decision about a required physical presence to be overturned. Until something happens on the federal level, though, we are likely to continue to see sales tax agreements between Amazon on individual states, as well as efforts to encourage online retailers to collect sales tax on purchases.

(Photo: thisisbossi [5])