Recent Developments in Sales and Use Tax of Internet Transactions

Tax Professionals Resource
September 12, 2012 — 1,382 views  
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Most people do not think about sales tax when making purchases on the internet. They just know that there is no tax, which gives the internet vendor an advantage over the local merchant in states that have a sales tax. The reality is that untaxed internet purchases are to be reported on the local income tax return and use tax paid by the buyer. 

Just what is use tax? It is the payment of the equivalent sales tax that was not collected by the seller. Purchase a computer on the internet and pay no sales tax. The price must be reported on the income tax return and the sales tax paid. The reality is that most people either do not know they are supposed to pay use tax, or they just neglect to report and pay the tax. 

So what are the most recent developments in the efforts by the states to collect sales and use tax? For use tax, it is an effort to educate taxpayers of the requirement to report the sales. This is done by placing a line item on the state income tax return to report use tax. Another means is providing a table that makes figuring the tax easier. Two states that have experienced some success are Maine and Vermont. This may be explained by the fact they both border New Hampshire, one of the few states without a sales tax. Enforcement is a problem because the amount each individual taxpayer would owe is small. So states are concentrating on requiring internet sellers to collect the sales tax.

One way is to negotiate with large sellers like Amazon. The states of Nevada and Tennessee have both obtained agreements from Amazon to collect sales tax from buyers in their states beginning in 2014. The problem with this approach is the fact that each state has to act on its own. In addition, even large sellers like Amazon represent only a small part of the problem. The answer lies with federal legislation. 

States have worked together to adopt the Streamlined Sales and Use Tax Agreement. This document makes it easier for internet sellers to collect the proper sales tax. At the present time it is voluntary. Until Congress passes legislation requiring internet merchants to collect local sales tax, states will be left with the remedy of use tax. The chances of that happening are hard to predict.

Tax Professionals Resource