Exposing the Myth of 'Tax-Free' Cyber Monday
It's Cyber Monday!! The online equivalent to Black Friday and a day that's anticipated to be the heaviest online shopping day in history, according to comScore, Inc., a leading Internet technology company that measures and analyzes what people do as they navigate the digital world. And while many of you have been perusing the Internet for Cyber Monday “deals,” my focus is on "Cyber Monday and sales taxes."
Why? One reason is because e-Commerce/Internet Taxation happens to be a specialty of mine. And in addition to advising e-Commerce clients on tax issues, I've been blogging about "Internet sales taxes" for the past three plus years! Incidentally, the first Internet sales tax post I ever wrote was for AllBusiness.com way back in July of 2010, shortly after a federal Main Street Fairness proposal was introduced. (See, “The Main Street Fairness Act: Explaining Internet Sales Taxes”, AllBusiness.com, July 24, 2010)
In addition to writing numerous articles on Internet Taxation, I keep my pulse on this topic and in doing so, have read way too many reader comments which support that folks, in general, falsely believe that shopping over the Internet is "tax-free".
Now allow me to diverge for just a minute because I simply have to elaborate on this topic of reader comments to make a point. As many of you might know, within the past two years, the number of states in which Amazon.com collects sales tax has exploded! Heck, at the beginning of 2012, Amazon was only collecting in five states but by January 2014, the internet retailer will be collecting in at least 15. Because there's plenty of media coverage every time Amazon starts collecting in a new state, there's always an abundance of reader comments that follow the media report - comments from folks that are not just downright angry.... but gravely misinformed!
And so, today I'll be writing my annual "Cyber Monday - Taxes" post and expose the myth. That's right, I've got news for you Cyber shoppers; for the vast majority of you, those Cyber purchases you make today are NOT tax free!
Smashing the Myth - Purchases Made Over the Internet Are NOT Tax Free
Yep, that right! One of the biggest myths about shopping online is that purchases made over the Internet are "tax free." Here's a statement we've all heard (or maybe even said), "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 your Internet retailer didn't charge you sales tax, it's very likely that you still owe tax to your state. 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.
Wait a Minute, I'm Supposed to Pay a "Use Tax”? That’s News to Me!
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?" (Or in the case of those angry readers who don't like Amazon collecting sales tax, "I'm being taxed to death so I'll just buy my stuff from a different internet retailer!" Hello, once again, you still owe the tax!)
Here’s the deal. Every state that imposes a sales tax has an equivalent "use tax". When tax is charged on the sales transaction, it's referred to as a sales tax. But when sales tax isn't charged at the time of sale and the purchase is not for a tax-exempt item, the tax that is owed is referred to as a "use tax". In general, a use tax is defined as "a tax on the use or consumption of tangible personal property in a state". In general, the same state tax rate applies whether it's charged as sales tax or paid as use tax. (However, a customer’s tax could be based on a different total rate in states which impose both a state rate and local jurisdiction rates, e.g., county, city, school district, etc.) Also, because a state decides what's taxable and what isn't, in general an item will be subject to tax (or exempt) regardless of whether it's purchased at the store down the road or on-line.
How do you report and pay your personal use tax? 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 and paid together with your personal income tax. 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 suppose to keep track of their "tax-free" purchases, many don't. So some states also have use tax tables in their instructions to help residents estimate their annual use tax bill. Heck, even states without a personal income tax - like Texas and Florida – have a separate form for reporting use tax. And for those of you that use one of the popular tax return preparation software programs, I happen to know that some of these software programs specifically ask whether the user made purchases over the internet.
Alright, So Now I Know About "Use Tax", But I Also Heard There’s a Big Push to Pass a Federal Bill That Will Make All 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, don't always pay – these purchases generally escape taxation.
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 a “physical presence” in a state. While that’s generally true, states are redefining what a “physical presence” means and there are many "less than obvious" activities that a state might say creates a “physical presence.” At the end of the day, let's just say that an out-of-state retailer (whether Internet only or brick-and-click) must be engaged in whatever activity a state says establishes nexus in their state in order for that retailer to have to collect tax from their customers in that state. (By the way, I wrote about many of these less than obvious activities in my August 29th, AllBusiness Experts post, "Five Things SMBs Should Know About State Tax Nexus")
So here’s the status of the federal "Internet Sales Tax" bill. The federal bill, named the Marketplace Fairness Act of 2013 (S. 743), was passed by the Senate on May 6, 2013. I wrote a detailed AllBusiness Experts blog post on this development in May, just days after the Senate passed the proposal. (See my May 10th post, "The Marketplace Fairness Act: What All SMBs (Not Just Internet Retailers) Need to Know") As I pointed in that post, that this was the furthest any federal bill has progressed in years. (There have been many similar bills introduced in prior years.) And, as the title suggests, I also pointed out that the proposal's impact isn't limited to Internet only or “Amazonian” sized businesses, but could also impact many brick-and-mortar and brick-and-click SMBs.
After the Senate's passage of the bill, it was sent to the House Judiciary committee for consideration where it has basically sat for months. Part of this delay was due to Congress taking its customary one-month summer recess. But the Chairman of the House Judiciary Committee, Bob Goodlatte (R-VA), has also said on several occasions that he doesn't entirely agree with the bill. This is possibly another reason why there’s been no real action on the bill. The point is that the bill really hasn't moved - and given all the other issues Congress has had to deal with recently, such as the Government shutdown and the ObamaCare Health Website fiasco, there's no telling what will happen. Still, the lobbying efforts by organizations advocating for, and against, the proposal is going full-steam. It's also been suggested that the proposal could be tacked on to a “must pass” Defense bill. So, the reality is that anything could happen to the Marketplace Fairness Act of 2013. 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 2013 – and it's projected to be a BIG online shopping day! According to comScore, Inc., 2013 Cyber Monday sales, which approximated $1.25 billion in 2011 and $1,465 billion in 2013, is projected to surpass $2 billion today! That means that even if my message 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!)
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- Missed my last post? Catch it here: Business and Individual Taxpayers Must File and Pay Taxes Despite the Shutdown
- Future topics I’ll be blogging on? More on what Obamacare Means for Small Business, An Update on Those Controversial Amazon Laws, What Small Business Needs to Know about the Demise of DOMA, Taxing the Cloud, The Best States for Small Business, Stock Options and Small Business, and so much more.
