Cyber Monday Shoppers: Your Online Purchases Are NOT Tax-Free
I’m going to make a bold statement that may surprise quite a few of you. Those Cyber Monday purchases you’re planning on making – they’re not ‘tax-free’. That right! For the vast majority of you, purchases you make over the Internet on Cyber Monday - or just about any other day - are simply not ‘tax-free’.
Tomorrow is Cyber Monday, the online equivalent to Black Friday. And according to predictions by, comScore, Inc., a leading Internet technology company that measures and analyzes what people do as they navigate the digital world, Cyber Monday 2014 is anticipated to be huge!
And while many of you may be searching for the best Cyber Monday “deals,” my focus will be on "Cyber Monday and sales tax."
Why? One reason is because Internet sales taxes happen to be a specialty of mine. In addition to advising e-Commerce clients about their sales tax obligations, I’ve also written about and presented on every federal ‘Internet Sales Tax’ proposal that’s been introduced in Congress within the past four years. And in keeping my pulse on this topic, I know all too well that there are many misperceptions about purchases made over the internet. These range from the all too common misperception that Internet sales are ‘tax-free’ (they’re not), or that the reason internet sales often don’t include sales tax is because of a law called the Internet Tax Freedom Act (it isn’t), or that Congress is trying to pass a law by the end of the year called the Marketplace Fairness Act which will make all internet sales taxable. (While Congress is trying to pass the Marketplace Fairness Act by year end, the law won’t turn ‘exempt’ sales into taxable ones - they’re already taxable!)
So in my annual ‘Cyber Monday and Sales Tax’ post, I’ll be setting the record straight, exposing the misperception about those ‘tax free’ internet sales, and explaining what Congress may, or may not, do by year end.
Setting the Record Straight - Purchases Made Over the Internet Are NOT Tax Free
Now here's a statement you've probably heard, read or maybe even said yourself, "I'll just buy it over the Internet and save on sales tax."
Once again - here's the reality. If you make a purchase over the internet (or by phone or mail order) and the product purchased is taxable in your state, you still owe tax on that purchase even if the Internet retailer didn't charge sales tax on the order. That’s right, unless you're a resident of one of the five states that do not impose a state sales tax – Alaska, Delaware, Montana, New Hampshire, and Oregon - you, the purchaser, the ultimate consumer is responsible for reporting and paying the "use tax" to your state of residence.
I'm Supposed to Pay a "Use Tax”? That’s News to Me!
Quite often I’ll see or hear a comment which leads 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?"
Here’s the reality. Virtually every state that imposes a sales tax has a corresponding "use tax" – which is owed to the state when sales tax isn't charged at the time of sale and the purchase isn’t otherwise exempt. A use tax is often defined as "a tax on the use or consumption of tangible personal property in a state". Generally, the same tax rate applies whether the tax is charged by the retailer as a sales tax or remitted to the state by the consumer as a use tax. Also, because a state decides what's taxable and what isn't, an item will generally be subject to tax (or exempt) regardless of whether it's purchased at the store down the road or on-line.
If you're a resident of a state that imposes a personal income tax (all but about seven states do), your use tax is reported on your personal income tax return. Of the states with a personal income tax, at least half include a line on their tax return for reporting use tax. Although residents are supposed to keep track of their "tax-free" purchases, many don't, so some states also provide use tax tables to help residents estimate their annual use tax proposal. And for those of you that use one of the popular tax return software programs, you may have noticed your tax software asking whether you’ve made purchases over the internet - this is so that this information is reported on your personal tax return.
Okay, You've Explained the "Use Tax" But I Also Heard That If the Marketplace Fairness Act Passes by Year End All Internet Sales Will Become 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, don’t always pay – these purchases generally escape being taxed.
Now, before I continue, you might be wondering why many online retailers don’t charge sales tax already. It’s because an Internet retailer must have a connection or tie – a “nexus” - to a state in order for the state to have the authority to require that retailer to collect its sales tax. Often you’ll hear that nexus means having an in-state “physical presence.” While that’s generally true, you’d be shocked at how aggressively states are redefining what a “physical presence” means. The reality is that there are many “less than obvious” activities that can create a “physical presence.” So let’s just say that an out-of-state retailer (whether they’re an Internet only or brick-and-click) must be engaged in whatever activity a state says creates nexus in order for the state to be able to require that out-of-state retailer to collect tax from customers located in their state. (For more about State Tax Nexus, see my prior AllBusinessExperts post, “Five Things SMBs Should Know About State Tax Nexus“)
So now let’s get back to what’s happening in Congress – and what we might happen before year end.
In case you haven’t heard, there’s a proposal that’s been getting a heck of lot of attention lately! The proposal is called the Marketplace Fairness Act and, if you’ve been following this bill, you might recall this proposal was passed by the Senate way back on May 6th of 2013. I wrote a detailed AllBusiness Experts post on this development just days after the Senate passed the proposal where I explained what the proposal would do and how it’s impact would not be limited to Internet only or “Amazonian” sized businesses, but could also impact many brick-and-mortar, brick-and-click and even businesses that don’t think of themselves as retailers, like equipment manufacturers. This surprised many folks who think the Marketplace Fairness Act is just about making internet sales taxable. (Once again, they’re already taxable.)
You see, what the proposal would do is give states the power to require “remote” retailers to collect tax on sales to customers in their state – even if that remote retailer (notice I didn’t say internet retailer) did not have a “physical presence” in their state. There’s lot more to know about the Marketplace Fairness Act, like the fact that states would need to take certain actions to gain that “collection authority” or that small remote sellers would be exempt from the tax collection requirements. I explain all this in my May 10, 2013 post, “The Marketplace Fairness Act: What All SMBs (Not Just Internet Retailers) Need to Know“
But if the Marketplace Fairness Act was passed by the Senate nineteen months ago, what’s happened since? After the Senate’s passage of the Marketplace Fairness Act, the proposal was sent to the House Judiciary committee for consideration. You see, before a proposal can become final law, it must be passed by both chambers of Congress and signed into law by the President. Proposals are sent to a House or Senate committee before the entire floor votes on the proposal. In this case, the House Judiciary Committee never addressed the proposal. Oh yes, there have been indications along the way that the House might actually act on the Marketplace Fairness Act, or that the proposal’s sponsors would attempt to pass the Marketplace Fairness Act during the Lame Duck session. But on November 12th just one week after the November 4th elections, Speaker of the House, John Boehner (R-OH) announced that the Marketplace Fairness Act would not be addressed during the Lame Duck session. So does this mean the Marketplace Fairness Act is dead? Not necessarily. You see, the Marketplace Fairness Act has now been connected to another piece of legislation – one that would lift a sixteen year moratorium on the taxation of internet access.
Remember that Internet Tax Freedom Act I mentioned at the beginning my post? The law that some folks think is the reason internet sales aren’t tax. This particular proposal, which prohibits federal, state and local governments from imposing taxes on internet access, discriminatory ‘internet only’ taxes, and multiple taxes on electronic commerce will expire on December 11th. By the way, the House passed a bill back in July which would make the Internet Tax Freedom Act permanent. So as you see, the Senate wants one thing, the House wants another and we really are witnessing a final hour showdown in Congress.
The reality is anything could happen with the Marketplace Fairness Act. But for now, it isn’t the law and shoppers simply must remember that they owe a use tax on their “tax-free” purchases.
Final Thoughts
It’s Cyber Monday 2014 – and it's projected to be a BIG online shopping day! That means that even if my post reaches millions (wink!), these sales will go largely “untaxed.” So if you've got some shopping to do today - go ahead and join in on the Cyber shopping fun. (Just don’t forget that use tax!)
