Do I Pay Sales Tax on Internet Purchases?

The sales tax issue is one that can be very confusing. In this article, we take a look at the answer to the question of do I pay sales tax on internet purchases?

Sales tax is not a complex concept in and of itself. It is charged as a percentage of a purchase of some tangible item. That, unfortunately, is where the simplicity ends. The good news is there is no nationwide sales tax. The bad news is most states claim one and, being states, each does it differently and for different amounts. With this in mind, following is a general answer to this question. Your state, however, might handle the issue differently so speak with a CPA or tax lawyer if you are really concerned.

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Let’s assume I am a consumer. I live in California. I buy an exercise bike online. I am not charged sales tax when I do so. Do I have to pay the sales tax that the online site did not? The clear answer is no, but don’t get to excited. Many states like California charge you with the duty to pay a “use tax.” This tax is the equivalent of the sales tax. Very few consumers realize they are supposed to do this much less actually go ahead and file. So far, states have only enforced the requirement in audits that involve big purchase items. If I buy a Ferrari from a dealer in New York, California will want me to pay the use tax. I wish I had this problem!

What if I am a business? Before I answer the question, you might want to go get some Tums and a few aspirin. The answer depends entirely upon where your business is. If you live in a state that collects a sales tax, then you must do it. However, you must only do it for transactions that involve a customer in your state. For example, I would have to collect and pay sales tax to California if my business is in San Diego and I sell a widget to someone in San Francisco.

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Ah, but what about customers in other states? What if I sell to someone in Florida? This is where things get tricky. The law is really unclear at this point. The law that covers the subject is mostly decades old and covered the issue of whether catalog companies had to pay sales tax on sales in states they mailed their catalogs to. The answer was generally that they did not. Lawyers and tax authorities are in a perpetual brawl as they try to apply or distinguish this from the current situation with the web. There is no clear answer and the situation is changing weekly, so make sure to confer with a tax lawyer or quality CPA to get an idea of what your business should do.

The issue of paying sales tax on internet purchases is a hot one these days. Given the shortfall in revenues being suffered by states, expect to see them become very aggressive when going after it. Scarily, there is even a rumor circulating that the federal government may try to institute a federal sales tax to pay down the deficit. How scary is that?

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