Internet Sales Tax

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GloriaInTX's picture
Joined: 07/29/08
Posts: 4116
Internet Sales Tax

Should state sales taxes be imposed on out-of-state internet sales?

Let's assume you live in Utah, Hawaii or South Carolina, and you go to Nevada for a vacation. While in Las Vegas, you spend some money in the casinos.

Gambling is illegal in the state where you live, so should the cops in your home state be able to track your activities and arrest you for what happened in Nevada?

The answer, needless to say, is no. Or at least it should be no. Common sense tells us that state laws should only apply to things that happen inside a state's borders.

But this sensible principle is being tossed out the window by the U.S. Senate, which has approved a proposal that would give states the ability to impose their taxes on out-of-state sellers.

Many people think this is a debate about "taxing the Internet," but that's a misleading characterization.

If a merchant in your state makes an online sale to you or your neighbor, that seller will collect the sales tax levied by your state.

And if a merchant in another state makes an online sale to you or your neighbor, that seller is subject to any taxes imposed by the state where it is based.

But some governors and state legislators don't like this system because many states don't bother imposing any tax on sales to out-of-state consumers. And even if states levied taxes on sales to out-of-state consumers, what about the five states that don't have any sales tax? Wouldn't those states become "tax havens" for Internet sales?

For these reasons, some politicians fret that the Internet will put competitive pressure on them to keep their sales tax rates from getting too high.

These concerns are overblown. People generally shop online because of convenience, not tax savings. But it's also a good thing when states are forced to compete with each other.

States with no payroll income taxes, such as Nevada, Florida, Tennessee, Texas and New Hampshire, help restrain the greed of politicians in states that have punitive income tax systems, such as California, Illinois, New York and Massachusetts.

And if politicians in the high-tax states refuse to adjust their bad tax policies, then people should have the freedom to escape and earn income in other states.

The same principle applies to sales taxes. If politicians in, say, Arizona are worried that consumers will go online or travel across the border to avoid the punitive sales tax, then they should reduce their sales tax rate.

Politicians can choose to maintain uncompetitive tax systems, of course, but they also should be prepared to accept the consequences. I don't think California and Illinois should try to become the France and Greece of America, but that's something for the voters of those states to figure out for themselves.

In any event, they shouldn't have the right to force out-of-state sellers to act as deputy tax collection officials if they decide to impose bad tax policy.

But this debate isn't just about tax policy and the proper limits of state government power.

The bill still must go through the U.S. House, where the GOP is divided on the issue. If politicians in Washington approve the so-called Marketplace Fairness Act, they'll not only be authorizing extraterritorial tax enforcement, they'll also be setting in motion the creation of a database that will erode privacy for consumers and create opportunities for identity theft.

This is because the legislation only can be enforced if governments set up some sort of system for tracking where consumers live, what they buy and how much it costs. With 9,600 sales tax jurisdictions in the United States (cities and counties also impose sales taxes), this is a compliance nightmare.

And it means that your personal and financial details will be collected and stored in a database that will be a magnet for criminals and hackers from all over the world.

To be blunt, a sales tax cartel is bad news for tax policy and bad news for privacy. Let's limit the power of state governments so they can only screw up things inside their own borders.

Opinion: What's wrong with Internet sales tax - CNN.com

mom2robbie's picture
Joined: 01/20/07
Posts: 2541

this has already been law in Canada for a long time so not big news up here

Spacers's picture
Joined: 12/29/03
Posts: 4100

I never understood why this was such a big deal. If I buy something from a catalog or over the phone, I'm charged sales tax. Why should I *not* be charged sales tax simply because the purchase is done over the internet instead? There is absolutely no reason to say that "personal and financial details will be collected and stored in a database" except that it scares people. The only information that needs to be collected is the amount of the sale and the state it was sold to, and that's all. If the retailer keeps decent records, then reporting should be a snap; if the retailer doesn't, then maybe this will force them to modernize a bit so it can be. I see nothing wrong with that.

GloriaInTX's picture
Joined: 07/29/08
Posts: 4116

"Spacers" wrote:

I never understood why this was such a big deal. If I buy something from a catalog or over the phone, I'm charged sales tax. Why should I *not* be charged sales tax simply because the purchase is done over the internet instead? There is absolutely no reason to say that "personal and financial details will be collected and stored in a database" except that it scares people. The only information that needs to be collected is the amount of the sale and the state it was sold to, and that's all. If the retailer keeps decent records, then reporting should be a snap; if the retailer doesn't, then maybe this will force them to modernize a bit so it can be. I see nothing wrong with that.

You know that the business has to collect the sales tax and pay it to the state right? So if my business is in Texas I suddenly have to keep track of and pay 49 other states their sales tax which is also different depending on the county and city they live in.

AlyssaEimers's picture
Joined: 08/22/06
Posts: 6560

This reminds me of growing up on the PA/NY border. Everyone went to Erie to shop because their taxes were lower. The (hmm, what agency was it) would go to the mall a write tickets to anyone with a NY licence plate number to make sure they would pay sales tax to the state of NY. Obviously that did not last.

When it all boils down, I don't really care, but I think it is very petty.

Spacers's picture
Joined: 12/29/03
Posts: 4100

"GloriaInTX" wrote:

You know that the business has to collect the sales tax and pay it to the state right? So if my business is in Texas I suddenly have to keep track of and pay 49 other states their sales tax which is also different depending on the county and city they live in.

Yes, I'm aware of that, and it's not that difficult at all. I did it for clients for many years when I was working as an accountant. For most clients that had multiple state sales, it was a couple of hours of work, tops; we had one client that had multiple entities that all had multiple state sales, and it was maybe a day's work but most of that was just making sure everything added up correctly, and putting together the paperwork for the owner to sign all the checks. The only times we divvyed up the counties & local taxes was for California; the others we just sent off a check to that state's tax board. Now with so many things computerized it should be even easier, even for a sole proprietor, and not even writing a check, do an electronic funds bank transfer. This is a very standard thing that accountants do for their clients, and even the basic accounting software programs can handle it. I wouldn't be surprised if the major banks didn't start offering it as a business service, you could just key it in when you make your deposit, and they'd handle everything else.

Rivergallery's picture
Joined: 05/23/03
Posts: 1301

If I am understanding it right.. places without sales tax.. like Oregon, will have to pay other state's sales taxes.. right?

Spacers's picture
Joined: 12/29/03
Posts: 4100

I don't think so. You pay whatever sales tax is in effect in your state of residence.

Joined: 05/31/06
Posts: 4780

Oh, boo hoo. Companies who before didn't have any vehicle to market any way but locally (before the internet, that is) can now market their product to all 50 states (and the world?). And ~ wait ~ in exchange for this new nationwide/global market they have to comply with state sales tax measures? Cry me a river.

And no, Rivergallery, you are not understanding it correctly. You will continue to pay no sales tax if you live in OR. Sellers selling in OR will have to charge the end user of OTHER states their appropriate and collect it/remit it as part of the transaction. There is accounting software which automatically does all of that. Walmart, Amazon etc already have to do this ~ you don't really think that they have a small army of accountants figuring this all out by hand, do you?

Bonita, I'm surprised you think that its "petty". Online shopping is a $226 BILLION dollar/year business. You want to cut phones for the poor and infirm as a "good start" but don't want this booming industry to have to collect sales tax from consumers who are taking advantage of tax free shopping when living in states who charge sales tax? I think that you have your "petty" backwards.

KimPossible's picture
Joined: 05/24/06
Posts: 3312

"GloriaInTX" wrote:

You know that the business has to collect the sales tax and pay it to the state right? So if my business is in Texas I suddenly have to keep track of and pay 49 other states their sales tax which is also different depending on the county and city they live in.

Trust me its not like someone is keeping a notepad of this information. The data is all easily accessible and recorded at the time of purchase and i have little to no doubts that there is already software that would figure this all out for you. Seems like a small burden to bear considering you have now opened your business up to a nationwide audience.

Joined: 08/17/04
Posts: 2226

Yeah I'm not bothered by it. I experience it at many places I online shop at already for taxable items (that article is misleading...our sales tax has a lot of exemptions).

KimPossible's picture
Joined: 05/24/06
Posts: 3312

It is very interesting to think about really.

Does having an online store give users the ability to shop at stores in other states, or does it give the merchant the ability to open a 'store front' in every state.

If you think of it the first way (and the way the article presents it) it doesn't seem to make sense to charge other state's sales tax. If you think of it the second way, then it makes sense.

But I'm not sure if there is any justification to say one way to look at it is 'more correct' than the other.

ftmom's picture
Joined: 09/04/06
Posts: 1538

I think this article misrepresents what would have to happen. There is no 'central database' of everything you buy on line. Each merchent would keep a record of what you buy from them, which I would assume already happens. If they get audited they would show that info, but it isnt being recorded in some conspiracy of......shopping?

ftmom's picture
Joined: 09/04/06
Posts: 1538

I think this article misrepresents what would have to happen. There is no 'central database' of everything you buy on line. Each merchent would keep a record of what you buy from them, which I would assume already happens. If they get audited they would show that info, but it isnt being recorded in some conspiracy of......shopping?

Spacers's picture
Joined: 12/29/03
Posts: 4100

"KimPossible" wrote:

It is very interesting to think about really.

Does having an online store give users the ability to shop at stores in other states, or does it give the merchant the ability to open a 'store front' in every state.

If you think of it the first way (and the way the article presents it) it doesn't seem to make sense to charge other state's sales tax. If you think of it the second way, then it makes sense.

But I'm not sure if there is any justification to say one way to look at it is 'more correct' than the other.

I think it's the second way. The buyer isn't going anywhere; the seller is coming to him. That's why catalog sales are taxed at the home state rate and remitted to the home state. If you want to shop in a tax-free state, you need to physically go there to shop. That's a small price to pay when you are denying your home state the opportunity to charge sales tax on the transaction. Blum 3

And to address Gloria's question again... Presumably, if you're selling something to someone over the internet, you need to ask what state the buyer lives in because you have to send them whatever they bought, so there's actually very little additional record-keeping involved, just adding up the numbers at the end of each quarter. If you're a small-enough business that you don't yet need computer software and/or an accountant, then this probably won't be a burden on you. If it becomes a burden, then plunk down $180 on Quickbooks Pro and make your life a lot easier.

Joined: 05/31/06
Posts: 4780

It doesn't even apply to businesses with less than a million $ in revenue.