Busting the Myth of the 'Tax Free' Cyber Monday

It's Cyber Tuesday! What's Cyber Tuesday, you ask? For some it's one more day of online shopping promotions. That's right, many retailers have extended their Cyber Monday deals into today either to bring in more revenue or because their servers weren't able to handle all the previous day's traffic.

But I'm calling today Cyber Tuesday for a different reason. Today's the day you tally up your online receipts and figure out just how much "use" tax you owe your state. That's right, you very well might owe use tax, but more on that in a bit!

This weekend I started putting my thoughts together on this particular post. In researching what was being said about Cyber Monday I was shocked at the number of articles with headlines such as "Last Year for a Tax Free Cyber Monday" or something similar. The message being that Monday's Cyber sales were "tax-free," at least for now.

I've got news for you - those Cyber Monday (or Tuesday) purchases you made are NOT tax free!  

Purchases Made Over the Internet Are NOT Tax Free

Perhaps one of the biggest misperceptions regarding buying online is that purchases made over the internet are "tax free." Here's a statement we've all heard: "I'll just buy it over the internet and save on sales tax". 

Here's the reality: If you've purchased merchandise online which is taxable in your state, and the online retailer didn't charge sales tax on the transaction, tax is still owed to the state, and you, the purchaser, the ultimate consumer are responsible for reporting and paying "use" tax.

The only purchasers who really can make online purchases "tax-free" are those who reside in one of the five states without a state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. 

I'm Supposed to Pay a "Use" Tax? I've Never Heard This Before!

I've often heard or read comments which lead me to believe that some folks quite honestly don't realize that their state requires them to voluntarily pay a use tax on their "tax-free" purchases. These comments take the flavor of "I'm supposed to pay a use tax? That's news to me!" or "I don't know how (or where or when) to report my use tax", or "What's the difference between a sales tax and a use tax anyway?"

When tax is charged on the sales transaction, it's referred to as the "sales tax." But when sales tax isn't charged on a taxable transaction, the tax owed by the purchaser is referred to as the "use tax."

A general definition of a use tax is that it's "a tax on the use or consumption of tangible personal property in a state". Typically, the same tax rate applies whether it's charged as sales tax or paid as use tax. Also, because a state decides what's taxable and what isn't, an item will taxable (or exempt) regardless of whether it's purchased at the store down the road or online. 

How do you report and pay your personal use tax? If you're a resident of state that imposes a personal income tax (all but about seven states do), your use tax is reported and paid together with your personal income tax. (Take a look at your state's individual tax form and there's a good chance you'll see a place for reporting your use tax.) States that don't impose a use tax generally have a separate form (such as Florida's DR-15 MO) for reporting use tax. 

So What's With All The Push to Pass Legislation to Make Internet Purchases Taxable?

Once again, internet purchases are already taxable, but because the use tax is a voluntary tax - one that many folks, even those who are aware of it - fail to pay, the vast majority of on-line sales escape taxation. 

It's no wonder states are concerned. Yesterday, we reported in our AllBusiness Daily News that leading analysts were predicting a record $1.2 billion in Cyber Monday sales. (See AllBusiness Daily News report, "Record Cyber Monday Sales Expected", 11/28/11). And as the great majority of those sales will go "untaxed" that translates to some significant state revenue losses.

For the states, it's impractical to pursue millions of individual purchasers for a few dollars of use tax. Requiring online retailers to collect and remit sales tax on sales to in-state customers is seen as sure way to capture a significant portion of these sales tax revenues.  

Why don't out-of-state e-tailers charge sales tax already? First of all, it's NOT because of some "loophole" or "special subsidy" or "preferential treatment" - as some media reporters would lead you to believe.

It's because an out-of-state retailer must have "nexus" to a state in order for the state to be able to require that retailer to register as a sales tax collector and charge sales tax. (See my 10/17/11 AB post, "State Tax Nexus: It's Not Just About Physical Presence" for more on nexus.)

If you haven't heard, we now have THREE proposals in Congress - all which would give states the authority to require out-of-state retailers to collect sales tax on sales to in-state customers even if those out-of-state retailers do not have nexus to their state. 

Back in August, I reported on the first of these three bills, the Main Street Fairness Act. (See my 8/22/11 AB post, "Can The Main Street Fairness Act Stop the Sales-Tax Madness?") Then, in October, we saw the introduction of a second bill, The Marketplace Equity Act, and earlier this month, a third bill, The Marketplace Fairness Act. As I detailed in my Main Street Fairness post, the first proposal would grant authority only to Streamlined Sales Tax states.

The Marketplace Equity Act, a bi-partisan effort, was seen by some as a proposal that was crafted too quickly and disregarded the efforts of the Streamlined Sales Tax project. The latest proposal, The Marketplace Fairness Act, has been referred to as a hybrid or compromise bill because it grants authority to Streamlined Sales Tax states but also provides an alternative for other states.  

So what does this all mean? If any of these proposals pass, many on-line retailers will be required to begin charging sales tax to customers in certain states. Which retailers, which states and how quickly this would all happen depends on which of the three proposals passes. I'm watching these developments closely and promise to update our AllBusiness readers as things evolve.

And what about the use tax and businesses? This is a small-business blog, right?

Well yes, but a discussion on the business use tax is a whole different story. Unlike the personal use tax, which, much to a state's dismay, can go uncollected, this isn't the case with a state's business use tax. As any business who has experienced a sales & use tax audit will tell you, states aggressively scrutinize whether a business has reported and paid all of its use tax. Yes there's much to talk about when it comes to business use tax issues, so we'll leave that for a future post.

Until then, happy cyber shopping.  And don't forget that use tax!