Paying Taxes on Internet Purchases


There are currently efforts in our government to pass sales tax regulations for Internet purchases, and many consumers are worried.  In tough economic times, can we afford an increase in taxes?


First, let me begin by saying that I am politically impartial to the topic.  Honestly, I care less what the prevailing thought is on either the blue or red side of the fence.  This topic primarily concerns me as a professional in the IT industry and as a consumer, nothing more.

Next, let me share a little secret with you: in many states (if not most), you should already be paying taxes on your Internet purchases.  Shocked?  I was too.

Have you ever heard of use tax?  You have probably heard the word in the phrase sales and use tax because generally, they go hand-in-hand.

Here’s how it works.  When you make a purchase in another state (including online), that retailer has the option of collecting sales tax from you – they may even be required to.  However, if they don’t, you pay a use tax back in your home state, usually at your state’s normal sales tax rate.

For example, if I purchase a book from an online store for $20, but they do not collect sales tax, Illinois (my home state) requires me to pay a $1.25 use tax on it that can be added to my yearly 1040.  In fact, Illinois adds that if they charge me too little, say 5% instead of the state’s 6.25%, I should pay them the $0.25 difference.

Confused yet?  Me too.

Well, let’s put it simply.  If you do not pay sales taxes on your Internet purchases, there is a good chance you should be paying use tax instead.

Why doesn’t the online retailer collect it for us?  Because they are as confused by all of this as we are, and they would rather put the ball in our court – putting us on the hook to pay our own taxes.  How nice of them!

Retailers also choose not to collect taxes because it gives them an advantage over their brick-and-mortar counterparts.  Many times, the money saved on taxes makes up for the cost of shipping – driving more customers online for convenience.  With free shipping, consumers believe they are saving money, but in reality, they aren’t (with the cost of use tax).

Anyway, the bills being introduced would force retailers to collect the taxes, which takes the burden off of us.  So this is not really a tax increase; it is collecting taxes that are technically due already, but putting the burden on the retailer and not on us.

This is a good step in the right direction, but of course, the lawmakers could have made it a lot easier.  The laws for each state are complex, and some collect state, county, and municipal taxes.  Imagine being a small company trying to navigate that mess across 50 states!

The government could, at least, force states into one tax rate across the state – dropping county and municipal taxes.  If they did, more online retailers would be likely to comply.  It’s so difficult now that many choose not to.  Simplifying the process, and flattening the rates, would actually increase revenues for many states.

Why does any of this matter to a tech guy like me?  Because managing these extra tax burdens on ecommerce sites is difficult, to say the least.  Trying to keep up with the constantly changing tax landscapes across 50 states is anything but easy.

It has also affected jobs.  For instance, when my lovely governor passed an Internet tax bill in Illinois a few years back, it sent a lot of tech jobs to other states.  The law is so strict that I cannot even place ads on my website for companies like Amazon without it causing a taxable event.  Thank you, Mr. Governor.

There are many points to consider with instituting a nationwide Internet sales tax, but I’m not overly impressed with the currently introduced legislation.   I think our political leaders could have done a better job at drafting a bill that helps states collect revenues while streamlining the process at the same time.

Regardless of what happens with this bill, or the next, Internet taxes are coming, one way or another, so be ready for it.

Read more of our Tech Talk columns.

Copyright 2013 Chad R. Torgerson


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