Why You Should Care About An Internet Sales Tax

By Brian O'Connell | January 02, 2012 AAA
Why You Should Care About An Internet Sales Tax



Monday, Nov. 28, 2011, was one for the record books. That day, ubiquitously known as "Cyber Monday" to shoppers and retailers, saw $1.25 billion leave consumer pocket books. That number was 22% higher than in 2010, according to the internet analytical firm comScore. (To help you with your holiday shopping, read 7 Tips For Shopping Online Safely This Holiday Season.)
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All told, comScore reports that online shoppers spent $26.8 billion from Nov. 1 to Dec. 12, 2011 – that's up from $23.3 billion from the exact same period in 2010.

Now, $26.8 billion is a lot of dough – but often, state and local governments can't get their meat hooks on so much of a nickel of that money.

Why? Because bylaw, interstate and online retail transactions aren't subject to taxes. That's right. Spend $100 down at the local mall, and expect in most states to pay 3%-to-8% in sales tax. But buy those same items online, and you pay no tax at all (although you will have to pay for shipping, but that's a story for another day).

Here are the current rules on online sales tax. Unless a retailer has a physical presence in a state, that online retailer is exempt from paying sales taxes. Indirectly, that makes the online consumer exempt from paying a sales tax on that transaction as well.

That's been the deal since 1992, after the U.S. Supreme Court ruled in Quill v. North Dakota that merchants don't have to collect sales taxes from out-of-state customers unless that retailer has what the court calls a "nexus" - an actual, physical operation (like a storefront or a warehouse) in the buyer's home state. So if Amazon.com doesn't have a distribution center or other physical site in Massachusetts, it doesn't have to collect a sales tax on that iPod purchase from the college kid in Boston. (For more, check out Comparing Online And In-Store Prices.)

Almost 20 years later, brick-and-mortar retailers are howling that their internet competitors have unfair leverage, as online merchants can charge cheaper prices for their goods and services since they are not subject to a sales tax.

Congress is finally lending a sympathetic ear to the brick-and-mortar retailer. Now, there are three bills being debated in Congress that would impose a sales tax on internet purchases. Each would impose the same state tax on brick-and-mortar purchases as it would online purchases, and each would mandate retailers to collect those sales taxes and forward them to state and local governments.

Nothing is ever guaranteed in Washington, D.C, but many retail industry observers expect some version of an online state tax bill to pass in 2012. (even Amazon has signed on to the idea of an internet tax bill, after years of fighting one.)

The impact on consumers would be moderate, but immediate. Most likely, online merchants would hike their prices to compensate for the amount of the tax. So in Rhode Island, where the state sales tax is 7%, expect that $100 satellite radio you bought from Best Buy online to rise by about $7 after the new tax rules are set in place.

Online retailers won't like it, but there's a sense that a mandatory state sales tax for internet purchases is inevitable.

For consumers, expect prices to rise on goods and services when the new taxes are green-lit by Congress. It won't be by much, but those price hikes will likely be enough to get your attention – and maybe make you think twice about making the purchase at all. (To learn more, read Is Online Shopping Killing Brick-And-Mortar?)

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