Many holiday shoppers now make their purchases online. And unless you live in the state of New York or a few other locales in the United States, chances are your online holiday shopping is tax free.
Currently, several states offer tax-free shopping on all purchases, online or otherwise, including Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. Any goods purchased in those states are tax-free of course, and this has long included mail order. This has served as the basis of tax-free Internet shopping.
Since the early days of the Internet there’s been a loophole of sorts that doesn’t require vendors to pay sales taxes for Internet sales, at least for those purchases made by a resident of another state. So while a California resident might have to pay California sales tax when making a purchase from a California Internet seller, there would be no sales tax if the purchase was made from Amazon.com, which doesn’t have a California office. Thus the purchase is tax free.
This shouldn’t be confused with the Internet Tax Freedom Act, which was signed into law on October 21, 1998. The intent of this piece of legislation was essentially to promote the potential of the Internet, and it wasn’t to stop taxes on sales of goods or services, but rather to bar federal, state, and local governments from taxing Internet access or imposing specific taxes on bandwidth or e-mail. Congress has already extended this original enactment three times, most recently in 2007, which now extends the moratorium until November 1, 2014.
What’s happened is that some states, notably New York, have seen this as a lost source of taxable revenue and have begun to require Internet retailers to charge taxes when selling an item. This includes items shipped from out of state.
The rational for not charging the sales tax for goods and services purchased online was that, as with the Internet Tax Freedom Act, it promoted growth in the sector. But given that some mass retailers have struggled, the Internet has seen its shake out and the larger online retailers, such as Amazon.com, continue to get bigger.
Main Street has seen threats from discount warehouses, big box stores, and obviously mail order catalogs for years, but unlike those other rivals, the Internet retailers were given a free pass. Not only could these virtual stores buy in larger bulk since their overhead was essentially just huge warehouse distribution centers — which enabled them to offer the lowest prices (and many times even include free shipping) — but the tax-free incentives made it an offer no one could refuse. Obviously, requiring taxes makes the end user pay a bit more, but it could level the playing field and that could mean new jobs.
Better to see the states charge for consumer goods than raising local taxes, which of course is the alternative. There have already been calls in Congress for a European-style value added tax, which would mean goods would be taxed at every level of their sale. Trees to make wood to make chairs would be taxed to the grower, the supplier, the builder, the retailer, and of course the customer. Taxing online purchases could make a value added tax unnecessary.
Here too is where eBay, PayPal, and all the other auction-based online transaction services should consider looking into taxes. This issue is a little more complex because it often involves “the little guy,” who already faces fees from eBay listings, sales, and of course even more fees when using PayPal. The problem is that the seller is paying a laundry list of fees, buyers get the merchandise, and Uncle Sam gets . . . well, nothing, at least not from these individual sales.
Conversely, it’s easy to say that many eBay sellers are doing nothing more than having a virtual yard sale, but in truth those proceeds are legally taxable as well. Most people just don’t report these sales. These sellers have been getting a free pass for years.
So really, it’s the bigger sellers that need to be examined. How many small businesses are now essentially eBay sellers of goods such as DVDs, comic books, and video games? Those PowerSellers, the ones with tens of thousands of feedback, are the new mom and pop retailers, but again consider that many are working from home, aren’t paying the rent on a storefront, and even if they pay their taxes, no one’s collecting the taxes from the individual sales — the kind you would pay if you bought the same comic book at the local shop.