Internet Sales Tax Battle

The online book retailing giant, Amazon, recently lost their lawsuit against New York. Amazon sued the state of New York over the state’s requirement that companies who do business online must collect internet sales tax on products shipped to residents of the state – even if the company is located somewhere else. Compare this with the tax situation that customers are used to, which is to not have to pay sales taxes on purchases from online companies that don’t have a physical location in their state.

With the down economy, New York is going on the offensive in terms of collecting tax revenue. The most obvious choice for them is to tax online sales. Consider that in 2008, sales from people buying online was around $204 billion. That is up from $175 billion in online sales in 2007. This data came from Forrester Research. So if state governments nationwide were to all collect internet sales taxes, they would generate $3 billion in new revenue. That’s a lot of change!

Luckily for consumers who buy things online, the U.S. Supreme court made a ruling in 1992 that said that states can’t force businesses to collect taxes on sales unless the merchant has a physical operation within that state. As an example, if a consumer in Arkansas were to buy a Dell computer online, the state of Arkansas cannot force Dell to tax the consumer unless Dell had a physical office in Arkansas.

In the example above, the consumer wouldn’t have to pay an online sales tax. Rather, they would have to self-report taxes on the computer that they purchased from Dell’s website. This is called a “use tax.” But in reality, not many people self-report.

The tax rules are complex, but many states are undaunted. Twenty-two states have banded together in the Streamlined Sales Tax Project (SSTP) to try and simplify the nationwide hodge-podge of tax rates and rules. The SSTP plan to take their idea to Congress in 2009. Will the poor economy help SSTP make their case to Congress? For online consumers, let’s hope not.

The participating states whose tax laws meet the SSTP include: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, and Wyoming.

New York wasn’t listed above. Nonetheless, that state spear-headed the effort to collect sales taxes from all online merchants. Round one goes to them. They won their lawsuit against Amazon. But NY’s tax crusade doesn’t end there. Next stop for the government of New York state … they want to tax online music downloads. Watch out Apple iTunes!

Frank Mather writes about taxes on his website, []. For more information on internet sales tax [] and other US tax issues, visit Mr. Mather’s website.

By Frank Mather

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