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What if sales tax were collected on online purchases?

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In our next edition of our nascent What If? series, we take a look at a target of the fiscal hounds. Since the dawn of time, sales tax was only collected on internet sales if the vendor had a physical presence in the state of the buyer. As many state governments ponder how they will get their budget back into the black, after plummeting home values and real estate tax revenues, collecting sales tax on online purchases seems to be a popular idea.

What would happen if sales tax were collected on online sales?

For Vendors

They hate it for logistical reasons because having to collect fifty different sales taxes (technically fewer than that because some states don’t collect sales tax) and filing them with the state would crush many small businesses. There would be companies out there willing to fill the void, providing software to track those purchases and make those filings, but it would represent a big headache for stores, especially the small mom and pop varieties.

For Governments

More money. Consumers spent a billion dollars on Cyber Monday. One percent of a billion is ten million. While Cyber Monday is the biggest online shopping day of the year, that’s enough of a taste to get lawmakers excited.

For Consumers

For the consumer, chances are nothing would change except states would have an influx of new revenue. Whenever I buy something online, it’s usually because I can get a wider selection, more access to research, and a better price. The fact that sales tax isn’t collected is just icing on the cake, it’s the other things that make the online experience so much better.

If you wanted to score a great Black Friday deal, you’d have to get up early, drive to the store, wait in line, and then fight other customers to get your deal. You have one shot at it too, because you can’t be at multiple store openings at once, and everyone else is miserable and cranky because it’s freezing and it’s early.

If you wanted to score a great Cyber Monday deal, you’d have to get up early, sit at your computer in your warm house, and roll the dice and hope the computer gods smile favorably on you. If things don’t work out, you try another site. Or another. You might be cranky because you didn’t get the deal you wanted but you’re minutes away from crawling into your still warm covers and fall back to sleep.

Sales tax isn’t the reason why online shopping is so popular, it’s all the other reasons. Introducing sales tax to online purchases would shift some of the purchases offline but not enough to hurt online sales.

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59 Responses to “What if sales tax were collected on online purchases?”

  1. nickel says:

    Sales tax is definitely a part of the puzzle, though. Lower prices, better selection/availability, convenience of home delivery, and no sales tax. Those are the things that most people are looking for when they shop online, though not necessarily in that order.

  2. Dylan says:

    What if there were a federal sales tax applied to online purchases? States could give credit for taxes paid and the federal government could return some portion of that revenue to states. I think that is a better solution than asking business to collect for every state with a sales tax.

    • cubiclegeoff says:

      I think this would be the easiest way to do this. However, I’m not sure the government would be great at giving out the money appropriately. States where online sales are higher may end up with a smaller share than those with lower online sales. For example, this happens with the gas tax. Gas tax money is spent disproportionately to how it is collected (like the midwestern states get a higher percentage compared to what is paid through them than coastal and high-population states).

  3. Elizabeth says:

    Until your last post, I had no idea that Americans didn’t pay sales tax on online shopping! Here in Canada, we pay provincial sales tax and the GST (or the combined HST, depending on where you live) on online purchases. If we order from the States, we’re looking at duties and exchange rates as well as.

    Online shopping has been gaining popularity here because more options are available to us and the convenience and prices make it worthwhile. We pay taxes offline and online, so it’s no big deal to us.

    • govenar says:

      Clarification: Americans do pay sales tax for online shopping, but stores only collect it if they’re in the same state as you; when they don’t collect it, consumers are supposed to still pay it when they file their taxes, but hardly anyone does.

    • Ryan says:

      Elizabeth, please stay in Canadia.

  4. Shirley says:

    Nearly everything that I can’t buy at the grocery store is bought online. Adding sales tax to those purchases wouldn’t change my shopping habits at all.

  5. Texas Wahoo says:

    Don’t most states require you to pay sales tax on online purchases? I know that in Virginia, you are not charged sales tax on the purchase, but you are supposed to report online purchases for which no sales tax was paid on your income tax.

    • Scott says:

      The operative words are “supposed to”…that’s why states like New York is sticking it to the companies to get to the tax payers.

      The companies are in a catch 22 because of their customers.

    • Jim says:

      Yes, in many places it’s called a use tax but how many people pay? If they did, then states wouldn’t be pursing a tax of online purchases.

      • freeby50 says:

        I found an article that said that only about 1.5% of people pay the use tax.

        Voluntary taxes with no enforcement don’t usually work as well.

    • billsnider says:

      Note that there is a state and local compomnet. So doing this by the merchant is a bigger headache than you think it is.

      Also the supreme court has already ruled that states cannot charge sales tax if the seller has no physical psesence in the state. This does not stop them from trying. as someone said, they are all bust and need the cash.

      Bill Snider

  6. Scott says:

    Sales would drop initially at these sites. People would eventually come back for convenience & free shipping / ease of buying & better prices since they do not have retail stores to pay for.

    I do look at retail vs. online and consider taxes, delivery charges & price on large purchases, small ones, not so much.

    Free shipping on $25+ at Amazon is a winner for me and the convenience of not having to go to Walmart / Target for toothpaste is very important for me. When I do go retail / big box, I buy enough for at least 3 months time so I don’t have to return to those crazy stores.

    • billsnider says:

      There is no such thing as a free lunch. They have higher prices to compensate for no shipping charges.

      Bill Snider

  7. Jeff says:

    For vendors, it is a lot more than 50 different sales taxes. Sales taxes are different from town to town and vary by product category. The end result is thousands of different tax rates need to be calculated.

    We used software to handle this at a former company of mine but it was expensive, needed to be constantly updated (local taxes rates change quite often) and was a disaster to report on.

    Not necessarily a big deal for large companies but I agree this could kill mom+pop online stores.

    • fairy dust says:

      Agreed – there would have been lots more than 50 different sales taxes to sort through (just in PA, I had to log one rate overall, one for Pgh, one for Phila), and as a Mom (just me, no Pop) home-based store that sold nationally via the Net, I guarantee it would’ve killed my business. There’s no way I could have handled the burden of that kind of reporting on top of all the other things I had to deal with daily.

      If “they” switch to a national sales tax, then it would be much more doable for all size businesses.

      • Elizabeth says:

        Interesting point. In Canada, we only have 10 provinces and 3 territories to worry about. (Mind you we have two different taxes, not one). I’m not sure how independents handle all the different rules. When I buy from a “mom and pop” business, it’s usually one within my own province.

    • Sales Tax collection and remittance is actually offered free by services such as TaxCloud.net. The states pay their costs and transfer liability from the merchants to TaxCloud, and integration with shopping carts is trivial. It’s incredibly simple for even the smallest merchants

  8. Scott says:

    What if they collect tax and do not pay the governments and make a big wind-fall profit from it…sounds like the future Madoff scandal.

    • billsnider says:

      States routinely audit companies. Not a smart idea to cheat. They will slam you.

      Look up Stu leonard in the internet. He is a famous retail operation in Connecticut. He was doctoring his sales tax books and went ot jail for it.

      Bill Snider

  9. cubiclegeoff says:

    I would think it’d still be a huge hassle to deal with, especially for small businesses. Also, I think if there are shipping charges, it could move some people towards shopping at their local store.

  10. TomM says:

    I would be against this. Once again, the only reason this is being discussed is because our government is fiscally irresponsible and they need a way to make up the shortfall in the taxes collected verses what they spend. Even if this was implemented they would still spend it all and come back looking for more.

    I’m totally against any tax increases in any way shape or form until our government stops spending more than they take in. They’re like a drug addict that simply can’t get enough of their drug of choice…in this case money.

    • Jim says:

      I’m totally against it but for less altruistic reasons, I just prefer not to pay an extra 6% on my purchases.

    • Scott says:

      I don’t think you can really call that a “tax increase”…

      They are losing what they normally get, fair or not is another discussion.

      • uclalien says:

        The questions is: Would many of these items be purchased if sales tax was required?

        I, for one, wouldn’t spend $500-1,000 on a new TV if I had to pay sales tax of roughly $49-98 (not to mention CA’s $25 recycling fee). In other words, many of these purchases might not occur otherwise.

        • Elizabeth says:

          Seriously? You’re complaining about 6%? Try 13%!

          When it’s the norm, you just have to budget for it. If I can’t afford the tax on an item, then I can afford that item, can I?

          • uclalien says:

            Not sure where I said anything about 6% anywhere in my post. But my local sales tax is 9.75%. And on a $500 TV, the effective tax is 14.75% when the recycling fee is included.

            Based on your 13% comment, I suspect that you aren’t in the US given the CA has the highest base sales tax rate in the nation, in which case, it likely isn’t an apples to apples comparison as the tax structures are probably completely different.

            And it isn’t a matter of being able to afford the additional sales tax. I could easily afford a $10,000 TV. But that isn’t the point. The higher government jacks up taxes, the less likely I am to make purchases where paying those taxes is required.

    • zapeta says:

      When people say they want the government to cut spending, they mean that they want the government to stop spending on stuff that they don’t think is important. Spending cuts are nice but taxes have to go up for the government to be able to provide services that people want and need. Try going a month without services the government provides (roads, police, fire departments, defense, etc) and then I’m sure you’d be happy to pay taxes.

      • govenar says:

        zapeta: so, keep the spending on “roads, police, fire departments, defense”, and cut out the other unnecessary junk. Seems pretty easy.

        • TomM says:

          Thanks govenar! And the last time I checked…I paid tolls for the turnpike in PA and my local fire department, and EMC, was all volunteer. And I do donate to them.

          I understand that taxes are a necessary evil and am willing to pay for the things we all need. But paying to study things such as the effects of cow farts seems a bit foolish.

          And we all know what is important, and not important. However, no one seems to want to make the tough decisions required here to fund the important stuff, remove the waste and then see what’s left over for pet projects. All this should be done while staying within a pre-determined budget. Basically, it should be run like most FISCALLY minded Americans run their own households.

        • zapeta says:

          Well, someone has to decide what is important and what is not important to someone is likely very important to someone else. That is the tricky part!

          • uclalien says:

            In some cases, it really isn’t that tricky.

            http://cnsnews.com/news/article/75198

            How projects like these ever make their way into a US stimulus package is beyond me.

          • govenar says:

            Maybe people could vote on what they want the government to spend on. I guess this is the idea behind the current system, where representatives vote in congress, but they seem to not be voting according to what the people they represent want. Now that we have more advanced technology, maybe it’s more feasible to let everyone vote.

  11. I’ve never pondered this much past not caring too much if I had one day had to pay sales tax online. However, thinking about it from the perspective of the vendor. WOW. I do my husband’s bookkeeping and he has to collect different tax amounts for two counties and about a dozen different cities. Thankfully Quickbooks manages this for us quite nicely. Our state allows us to charge a flat fee, say $100, then back out the taxes so the customer invoice would say $100 but once I transact it back at the office the invoice shows $5 tax and $95 for the service. What an undertaking it would be to actually charge taxes for online services.

  12. MB says:

    I must say that it’s unfair to charge one price to one customer and a different price to another customer simply because they live on one side of a border or another. Can we revisit why the online sites don’t simply pay taxes where their owners are located? For example, if I run an online business, I pay sales taxes to the state where I live. If I go to a brick-and-mortar store in another state, it doesn’t matter that I’m not a resident of that state. I still pay.

    But it is also unfair to create separate tax requirements based on virtual versus physical.

    • Scott says:

      Simple on the location idea, then all the businesses would be located in Oregon (no sales tax) or something like this. They would put their headquarters in a closet in that state and do all their fulfillment out of a low-cost state.

      Probably needs to be a fair tax put on online purchases…

      • cw says:

        The sale tax laws actually apply to purchasers, not the vendors. The vendors are just collectors. If the vendors were obligated to collect by federal law, it wouldn’t matter where they were located.

    • billsnider says:

      The merchant does not have to charge you a sales tax. They “DO” still have to pay it to the state. They have a presence there and must remit it to the state.

      Bill snider

  13. freeby50 says:

    Tracking the different sales taxes would not be a big deal. That could easily be handled by a service and computerized. There is actually already an organization setup to make collecting sales taxes very easy for the individual businesses. Its called the Streamlined Sales Tax project. Nobody uses it or knows about it cause its not currently necessary.

  14. I agree that the effect on consumers would be small, because if you buy offline, you still pay sales tax, so it would cease to be a factor at all, but that’s not really why most people buy online.

    However, the effect for merchants would be big, depending on how serious the states were about enforcement. I suspect we’d see the platforms for ecommerce like shopify or yahoo stores take over all the mom and pop operations, just so they can ease the administration burden.

    As it stands right now, though, we’re not really in danger of this; the 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298, (1992)) pretty much ruled out charging sales tax if the business doesn’t have a “nexus” in the state where the buyer is located. The really infuriating thing now is that states are going after sites like Amazon who have independent affiliates in their state and claiming that constitutes a “nexus”. Amazon then does what they have to: shut off all affiliates in those states, which means that the state no longer gets sales tax OR any income tax for the earnings those affiliates were getting. Once again, government proves that the more you tighten you grip, the more things slip through your fingers.

    • Don C says:

      Wow, someone actually citing the Quill case here! Accountant or lawyer?

      Jim – one other correction, there are a lot more sales tax rates than 50. You’re forgetting about al of the local jurisdictons too. NY has over 50 different local jurisdictions alone.

      There is a real administrative burden to the small business for having to file in all of these places and keeping track of all of the different rates.

  15. Sun says:

    Sst is a joke. Yet more unnecessary tax code. You have use tax on the books. It’s easy enough to enforce if you get visa mc discover Amex and paypal onboard. Calculate the tax you owe based on your ship to address. Not every address will be accurate but you could get 99% and work on the 1% on a case by case basis or fall back to charging state tax minus any local tax or special district tax.

    The technology and software already exists to do all this, but the credit cards are resisting and complaining it’s not possible.

    All government has to do is give each card company their routing and bank account number. Each state and special district will receive their portion of the sales tax on a daily basis if they want. For example, in California the state would get 8.75% and Los Angeles would get 1%.

    All automated and can be done today.

    • csdx says:

      Ship to address is a terrible idea: here’s a present grandma, oh and a tax bill to go along with it.

  16. Aaron says:

    “There would be companies out there willing to fill the void, providing software to track those purchases and make those filings, but it would represent a big headache for stores, especially the small mom and pop varieties.”

    This shouldn’t be THAT hard. I can’t imagine that one couldn’t set up a national tax rate database by Zip Code that retailers could access. (You could even do Zip+4, if needed.) Then when customers input their Zip codes, the taxes would be automatically calculated. You could even bake the lookup functionality into the e-commerce software that the stores use. If you had, for instance, the FTC host the database, and made it up to the jurisdictions involved to update it with their rates, then it shouldn’t be difficult to keep it all straight.

    • Jim says:

      I think (and I’m not a retailer so I don’t know) the hard part isn’t calculating the tax, it’s paying it out and managing the paperwork of filing all those forms.

  17. Steve says:

    For this to be truly fair, merchants should get a cut of the tax collected for another state as compensation. If I’m in Virginia and collect taxes for a virginia customer, then fair enough because I enjoy the services the state provides. But if NY wants me to collect tax on one of their residents, then there is no benefit to me, even though there is an expense to do so. Since they provide me no services, there it is morally wrong to expect me to work for them for “free”.

    The only other “fair” way (like fairness is ever a consideration)to handle this would be to collect state tax on the sale where is located, just like a “brick and mortor”. A few larger stores may relocate, but most small ones would not bother.

    • Jim says:

      Well, they are giving you the right to sell to people living in their state.

      • uclalien says:

        Jim,
        Hopefully this doesn’t come across as overly harsh, but this is quite possibly the most ridiculous thing I’ve ever see you write. The government doesn’t give buyers and sellers any such rights. If I choose to offer my hard-earned money in exchange for a good or service provided by another party, it is our choice, whether it be from my next door neighbor’s garage sale or from someone in another city, county, state, or country. The government can only strip me of this right.

  18. Alan says:

    The problem with collecting sales tax is the complexity of it all. The State of Washington has 39 counties and many cities within each county. Each of these may have a different sales tax rate as each governmental entity has local option sales taxes. If you are a retailer with a fixed location you know the sales tax rate for your location. A online retailer would have a hard time determining the sales tax rate because it could vary even within a zip code.

    • govenar says:

      Since online stores already have a system for collecting sales tax in some states (including all the different local variations), it probably wouldn’t be that much more work to handle it for other states.

  19. As a non-resident, this would be a further disincentive to buy from Amazon and other US on-line retailers

  20. eric says:

    I agree. No sales tax is just icing. It’s the convenience that’s really nice.

  21. Bernie says:

    I am sorry, but when does it stop?

    We are taxed for practically everything. I get taxed on my paycheck, taxed on my home, taxed on my car, taxed when I purchase at a store, taxed on my utilities, tax, tax, tax…..

    It needs to stop. Lower your freaking budgets, work with what you have, and stop needless spending, stop being corrupt with our money, be responsible, work on a REAL budget, when the money is gone, it’s gone.

    It’s one thing to be taxed and realize the things the taxes provide, it’s another when you are taxed and you see corruption, over spending, etc…

    I don’t want to be taxed anymore. I am tired of my money being stolen from my paycheck. If you want to tax me, tax me when I buy something. This nation loves to buy, buy, buy…tax that. I am all for the Fair Tax. Let me choose when I get taxed.

  22. Brent says:

    You are wrong. Consumers not paying online sales tax is THE major incentive for buying online, primarily through Amazon. I assume it’s Amazon’s lobbyists who have bribed politicians into not creating this simple resolution. If one were required to pay upfront for online sales tax, that would also dramatically make buying the same item from local retailers a more attractive option and would level the playing field. The results to state coffers would be huge. This should have been done 10 years ago.

  23. Terry says:

    Vendors would need to track more than 50 different sales tax tables because a number of counties and a number of cities have their own sales taxes..

    Even a five-digit zip code table wouldn’t completely resolve the problem because many counties and a number of cities have zip codes which extend beyond the county or city limits. (Detroit has at least three zip codes which extend outside the city.) Nine-digit zips would probably work.

  24. W. Brown says:

    Sales tax is made unnecessarily complicated by the various states. If you buy a hot dog to eat on the premises there may be sales tax; if you buy it to eat outside on a bench, there may not be a tax; if you eat half of it inside and half outside, can you get some of your tax back. Each state has many goofy rules such as that.

    Then they expect you to voluntarily pay a use tax on out of state purchases, but it is identical to the sales tax, so no one can really figure it out, so no one pays.

    If the states would get together and unify what is and isn’t taxed, it would be pretty easy for any merchant to collect the tax based on the buyer’s zip code (some cities also have sales taxes, so you can’t just go by state), and the merchants would have no complaint (other than that, currently, they can undersell local merchants because of not collecting the sales tax).

    Years ago the Supreme Court ruled that states could not collect sales tax on out-of-state purchases, primarily because it would be too complicated for the merchants to calculate it. Our political leaders apparently cannot understand that if they made the tax easier to calculate, the Supreme Court would have no basis to bar collection, and the states and cities would have a lot more money.

  25. Scott Greene says:

    The problem is NOT sales tax.
    The problem is the psychotic Income Tax system.

    Citizens and businesses of this country spend billions of dollars a year and then spend billions of hours in attempted Income Tax compliance. This just to figure out what they owe or don’t owe in Income taxes.

    The Income Tax code itself is made up of 9,834 sections comprising more than 16,845 pages of arbitrary and contradictory laws and opinions.

    This plus an additional two-and-a-half million more pages of Income Tax Regulations, Income Tax Revenue Rulings, Income Tax Letter Rulings, Income Tax Memorandums, Income Tax Publications, plus Tax Court, Federal Court and Supreme Court Opinions. These are all written in an effort to explain and/or argue about the mind-numbing Income Tax laws.

    Most personal, financial and business decisions all have to take into account this Income Tax system and generally require expensive assistance from tax accountants and lawyers who all have different opinions on how to apply the Income Tax legal code.

    They themselves do not understand many facets of the Income Tax code, the same way most government officials do not understand it (try calling them up and getting a consistent answer to the exact same tax question – good luck on that).

    This is no way to fund a government!

    Unless something is done to get rid of this
    “system” (by instituting a National Sales Tax instead), this Income Tax scheme is going to continue to wreak havoc on the United States economy and its citizens


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