With federal and state budgets still struggling, lawmakers are looking for ways to increase the money coming into their tills. Sales taxes are about a third of total state tax collections, second only to personal income taxes as the largest source of state revenue. But the Internet Tax Nondiscrimination Act (P.L. 108-435) means states don’t collect taxes on any out-of-state online transactions.
If you have a business in California, your website’s cash register is only required to collect taxes from Californians. Likewise, if you live in California and buy from an online retailer in Vermont, you don’t have to pay sales tax on your purchase.
Technically, customers from other states are supposed to pay use taxes but trying to enforce this is complicated and virtually impossible. This is because of the “nexus,” or physical presence, a concept that originated with the first use taxes implemented during the Depression.
New York State decided to apply this idea to the Internet with the Amazon Law. New York claimed that the commissions that Amazon paid to Empire State affiliates meant it had nexus in the state, and thus was required to collect sales tax. The state legislature passed a law supporting the claim. Amazon challenged in court and lost.
When North Carolina and Rhode Island passed laws similar to New York’s Amazon law, Overstock.com and Amazon canceled affiliate programs in those states, putting some online retailers out of business. California, Hawaii, Colorado, and Virginia have defeated the proposals to tax Internet sales, while other states, like Oklahoma, are going ahead with Internet tax measures based on nexus.
Nevada, Florida and Washington, among others, rely on sales taxes in lieu of a state income tax, so they have a keen interest in the issue and are working to broaden the definition of “nexus.”
- Internet sales tax could ease state deficit (sfgate.com)
- 5 ways an internet sales tax will impact your business (venturebeat.com)
- eTaxing (aphilosopher.wordpress.com)
- American love affair with the online checkout fuels state fight for millions lost in tax loophole (theage.com.au)
- Amazon Prepares To Take On Illinois In Sales Tax Dispute (wired.com)
- What if sales tax were collected on online purchases? (bargaineering.com)