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Sales Tax Online

Ecommerce seems like a tax bargain because when you buy online, you often don't pay sales tax. The reality is that you are probably breaking the law if you don't ante up some tax.

Many people think one reason for the dot com boom was that Congress set up a tax-free environment on the Internet by prohibiting sales taxes. As Johnny Carson might have said, "You're wrong tax breath."

While Congress did pass a moratorium on certain Internet taxes, Congress never banned Internet sales taxes. The reason that you're not paying sales taxes on your ecommerce is that the Supreme Court said that states can't require out-of-state sellers to collect your sales taxes unless the seller has a tie to your state like physical stores.

Still, the U.S. has never been called a tax haven so you know you're not off the hook. What many states did was create a companion tax to the sales tax called a "use tax." The idea is that with the use tax, they can collect a tax on out-of-state purchases their citizens bring back into the state. The hitch in the system is that the enforcement costs on the use tax are so high that states have to rely on an honor system and there is no meaningful enforcement mechanism. You're supposed to volunteer the tax because you're a good person.

I'm just curious. When was the last time you paid your use tax? Well, we both know the answer to that one and because of that, states claim they are losing billions in lost revenue.

To deal with this lost revenue, states have been working behind the scenes standardizing their tax laws. This effort, called the Streamlined Sales Tax Project, has quietly been gaining momentum.

The idea is to simplify and standardize state tax laws to make it easier for sellers to collect sales tax for the states. Forty-one states are participating and twenty have already enacted the system. They hope Congress will approve their plan by passing a law authorizing it.

States are encouraging remote sellers to voluntarily comply with their plan now before Congress makes compliance mandatory. Major perks for voluntary compliance are amnesty for any taxes they might have owed, and reimbursement of some of the costs in collecting and sending sales tax revenue back to the states.

If they don't join the system voluntarily, sellers could face lawsuits like the one Illinois has brought against over 60 major retailers. Illinois claims that they are owed millions for sales taxes they should have collected on Internet sales. To avoid these types of suits, some companies like Wal-Mart and Target quietly started collecting sales taxes on Internet sales earlier this year.

With all this politicking going on in the background as states try to collect what they perceive as lost revenue, I don't think this sales tax break is going to last much longer. The odds are good that your ecommerce retailer will be collecting a sales tax on your purchases real soon.

Oh yes. Please don't forget to pay your use tax! I'm sure that the Department of Revenue will be happy to help you with the paperwork.



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