Whether you have to pay sales tax on Internet purchases is a common question in a world where consumers buy everything from clothes to food to cars online. Some people view the Internet as the prime place to start selling items that are free from sales tax. Indeed, many online retailers often lure customers in by advertising that any purchases made will be free from sales tax. However, there are often cases where Internet sales are indeed subject to state sales taxes.
Where the Buyer Is Located
Generally speaking, if an online retailer maintains a physical presence in a state that charges a sales tax on most purchases, then that online retailer must charge sales tax on any items that are sold to customers within the home state. However, if the online retailer is selling an item to a customer outside of its home state, then it is not required to collect sales tax from that customer.
For example, suppose that Pete, who lives and works in California, likes to buy all of his cooking oils and spices for his restaurant over the Internet. He normally orders from a company that is headquartered and has its warehouse in Nevada. Because Pete orders his supplies for his restaurant from a vendor that is outside of California, the company does not have to charge Pete a sales tax.
However, now suppose that the company has opened a warehouse in California to better supply their regular customers there. Now, because Pete's order will be taken and shipped from California, he must be charged sales tax on his order.
How Do Large Websites Avoid Sales Tax on Internet Sales?
Large websites avoid sales tax by establishing subsidiaries that are solely responsible for the Internet part of the business model.
For example, the store that you buy an item from online may be a different legal entity from the corresponding brick and mortar store that is in your local shopping mall. Because that particular online store does not have an actual physical presence within your state, it does not need to charge you sales tax. This is a highly controversial practice that will probably be legislated in the future as many brick and mortar stores that do not have online counterparts are losing sales to the tax-free internet shops.
However, this issue becomes even more complicated when the online retailer allows a customer to make returns to a brick and mortar store that is technically a separate legal entity. Consumers will buy an item online that is free from sales tax, but are then able to return those purchased items to brick and mortar stores.
Consumers May Be Required to Report and Pay Sales or Use Taxes
For consumers that order tax-free items online, but live in states that charge a sales tax, they are technically required to report that purchase to their state tax agency and pay the sales tax directly to the agency. When consumers are required to do so, it is often called a "use" tax.
The sole difference between a sales tax and a use tax is the person that ends up giving the money to the state government. When it is a sales tax, the retailer is the one handing over the money, while a use tax is handed over directly by the consumer. However, collecting use taxes on small purchases often costs more than simply letting the consumer not pay the use tax. Instead, state tax agencies try to focus more on collecting use taxes for big ticket items that are purchased online with no sales tax, such as cars and boats.
Be aware, there are a number of states that have stepped up their enforcement of their use tax laws and are now trying to make their state residents pay the taxes that should be paid.
Get Legal Help with Your Internet Sales Tax Questions
For retailers and particularly Internet-based retailers, tax issues can get pretty complicated. If you have questions or concerns about how to properly comply with the tax code, you may want to consult with an experienced business attorney near you.