April 15, 2005 6:06 AM PDT

States yearn to collect online sales taxes

The arrival of April 15 doesn't mean your tax worries are over. You may owe more than you think.

Online purchases from sites like Amazon.com and eBay may seem to arrive tax-free. Strictly speaking, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time.

Few do.

That situation worries state tax agencies, which have long complained about individuals not volunteering how much use tax they owe from mail-order sales. The ballooning popularity of online purchases is making a bad situation worse, state officials believe. (All states with sales taxes have use taxes.)


Related story
Smokers asked to
cough up taxes

Michigan sends bills to
more than 500 residents
for cigarettes purchased
tax-free over the
Web.

California residents, for instance, enjoy a 7.25 percent sales and use tax. State law is strict: If Californians travel to a state with a 5 percent tax and shop there, the law requires them to cough up the 2.25 percent difference when they return. Online purchases are taxed as well.

But compliance is spotty at best. California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents aren't paying use taxes--$208 million of that due to online purchases.

"We are looking at ways to help solve the tax gap in California," Anita Gore, a Board of Equalization spokeswoman, said Thursday. "We're doing the background and research necessary to bring in more of this money."

Last year, California took a step in that direction by adding a line on its income tax form that requires residents to estimate how much use tax they owe. This year, the state tried a use-tax amnesty that brought in about $2.3 million.

That leaves the estimated $1.34 billion left to collect. "We're always following leads that are given to us, whether it's another government agency or an individual, to look into the possibility that somebody might owe us use tax," Gore said.

Other states report similar frustrations. Michigan estimates it will lose $345 million in 2005. That's up from a loss of $210 million in 2001, and the state says the Internet is to blame.

South Carolina took the unusual step of sending out a press release just before tax day five years ago. "With the boom in catalog and Internet sales, many electronic shoppers are unaware they may have a tax obligation when they make purchases over the Internet if the tax is not collected by the retailer at the time of the sale," the release said.

South Carolina estimates it loses $40 million a year from unreported use taxes. Like California, it has added a use tax line on state tax returns.

From the perspective of state tax collectors, the simplest solution would be to require out-of-state shippers to collect taxes. But shippers generally can't be compelled to do that, thanks to a Supreme Court decision that said only businesses with offices or other tangible connections in the destination state can be required to collect sales taxes.

State officials are lobbying Congress to change these rules. They're proposing a so-called "streamlined sales tax." The idea is to create a uniform set of rules effectively permitting tax agencies to require out-of-state sellers to collect use taxes.

"The states have gained momentum in the last six months," says Steve DelBianco, director of the NetChoice coalition, which represents eBay, eRealty.com, Oracle, Time Warner and VeriSign.

DelBianco, a critic of the proposed changes, believes that state claims about use-tax avoidance are overstated. "I can't believe there are a significant amount of Internet-based purchases that are done to save sales taxes," he said.

One exception to the general rule about out-of-state tax collection is tobacco. A federal law called the Jenkins Act states that out-of-state sellers can be required to report cigarette shipments to the destination state's tax collectors. Some states have sent bills to residents.

36 comments

Join the conversation!
Add your comment
We need a tax system for the internet soon...
Yes, it will be very unpopular. But the state governments will get their money one way or another. They will probably raise our property tax, or maybe even payroll taxes. I hate the idea too, but I also understand that we must pay taxes in order to have our roads paved, bridges built, schools maintained, etc. It will happen sooner or later. The more people use the web, the sooner it will happen.
Posted by TheMidnightCoder (61 comments )
Reply Link Flag
What you refuse to realize is that...
The reality is, "...roads paved, bridges built, schools maintained", in other words REAL SERVICES, only represent a SMALL-PERCENTAGE of our tax-dollars.

The last analysis, I heard, placed the final aggregation of TAXES and GOVERNMENT-FEES [paid by citizens at MORE THAN HALF of the average person's income.

And, still, THEY WANT MORE.

The majority of OUR MONEY is actually spent on THE BUREAUCRACY ITSELF, WASTE, and even, ...OUT AND OUT CORRUPTION.

In fact, the Government wants to SELL more, and more, of the PUBLIC'S PROPERTIES and SERVICES to private-enterprise. So, in the end, we will be spending MOST OF OUR LIVES doing nothing more than SUPPORTING A SYSTEM which serves NO ONE, ...BUT ITSELF.

This reminds me of state-laws passed, by the people, demanding a decrease in Government-spending. Where did the politicians take it out..? Why directly from "police, Fire-departments, and schools (which, all together, actually represented less than ten-percent of the budget).

Therefore, the perennial-call that taxes need to go up, in the name of providing BASIC-SERVICES, ...IS A LIE, pure and simple.
Posted by Gayle-Edwards (30 comments )
Link Flag
Only tax the tangibles
You are already paying tax on the Internet (check your phone or cable bill). But I presume you mean we should be taxed for services or sales rendered on the Internet.
The purpose of the (sales) tax in a state is to recoup the cost of the related infrastructure the state has provided (states are only collecting taxes so they can continue to provide services to you). A brick-and-mortar business needs state (and Federal) subsidized infrastructure and the legal protection that comes from the local and state government. That comes at a cost that is shared by the retailer and consumer as a sales tax. The retailer owns the ?burden? of collection (they employ accountants and build complex software systems to comply with state laws) and the consumer owns the burden of payment. The principles that drive state taxes are based on fairness. If a person or business is consuming more of a local business (and local resources), then they should contribute more to support the related infrastructure. If a consumer uses the Internet to mail order a product, then there is no consumption or utilization of local resources, and therefore no need for an additional tax. To exemplify, if I was wrongfully treated as a result of a mail-order transaction from a California based business, the lawsuit would likely take place in California, not the state I live in.
We should continue to tax as close to the "tangible" as possible (i.e. the shipper, the ISP, etc.) The Internet was not state subsidized, so the state has no claim to a tax base, nor do they have any jurisdiction over (nor do they incur any related costs) to businesses in other states. The Internet cannot be taxed! This is because the Internet is not a tangible, it is a concept. You cannot tax a concept, at least not in a free market or democratic society. If a retailer does not have a physical presence in a state, then they should not have the legal burdens of the regional tax laws placed upon them. One might argue that perhaps uniformity in sales tax would be the solution. Most states are opposed to that as it is one step closer to making it a Federal authority instead of a State authority. This is also good for Americans as it encourages States to compete, which is the basis of our economy.
When state officials say that tax revenue was ?lost? because a constituent mail ordered from a neighboring state, they are being unjust. In fact, the state has simply ?dis-incented? local retailers from selling that product in their state. If fair taxes are applied in a judicious manner, most constituents will choose to buy locally, both to support their local economy as well as satisfy their immediate needs without delay.
While this is a complex issue that deserves attention, lawmakers need to be very cognizant of the fact that America is currently overwhelmed with bureaucracy to the point that we are losing our edge in the Global market. This is the exact wrong time to be creating additional, impossible to execute, rules that discourage our advancement as a nation. The fact remains that many states have had surpluses in recent years and have had to issue refunds, so they should not be nitpicking over their loss of ?power? to incentivize and control their constituents (to stop smoking; to select DSL over cable based on their political affiliations; on-and-on...). Now is the time to think progressively and encourage progress. The decline in sales tax revenue is a natural thing in a Global economy, and should be allowed to happen naturally.
Ultimately, I think we should stop electing officials that are not properly educated in both political science as well as economics.
Posted by fastboxster (6 comments )
Link Flag
We're just revenue to the states now
Apparently -- we are just considered a source of revenue for the
states. And it appears they are becoming more and more
arrogant.

Federal Income Tax - 15-20% - very conservative number here
Social Security Tax - 15% (half paid by your boss)
State Income Tax - most states have an income tax of 6-7%
State Sales Tax - 7-8% (very few are under 7% today)
Gas Tax - (which is 25% or more depending on the price of gas)
Property Tax - 1-3% just for owning something big

And I can't even get into all the fees that are added for any use
of government facilities that your taxes should have paid for.

The result is than somewhere between 50-60% of your income is
going to some government agency. Agencies that have a hard
time even tracking where all the spending is going (billions are
unaccounted every year).

And despite that, our government spends more than it takes in,
leaving us with an even bigger bill in the future. As it is
discretionary spending is a tiny part of today's government.

But we are nothing more than lemmings to them. Willing to give
more and more of every dollar.

And use-tax: what a bunch of bull that is!!

Nevermind that many companies are still making money off of
internet sales because companies pay income tax on money
collected. It may not be the same states compared with sales
tax/use tax, but money is still flowing into them.

Then end result doesn't seem far away. You cannot collect more
than 100% of someone's money -- although I don't think it will
last until then. Each level of our government has become less
responsible for how they spend money with the more money
they get.
Posted by m.meister (278 comments )
Reply Link Flag
You know what's ridiculous?
I live in a state with a 5% sales tax. If a California resident visits my state and makes a purchase, the state of California feels obliged to request the addition 2.5% they would have paid had they made the purchase in California.

On the other hand, if I was to visit California make a purchase they do not feel obliged to reimburse me the 2.5% additional tax I paid them.
Posted by Angie_is_dying (3 comments )
Reply Link Flag
Will they pay us?
The article mentions that if CA residents purchase in a state where tax is 5%, we're suppose to cough the remaining 2.25%. Will the state reimburse us if we purchase in a state where tax is higher? I may be naive, but somehow I don't think that would happen.
Posted by (1 comment )
Reply Link Flag
No, California won't reimburse you
If you buy something in a state where the sales tax is 8 percent, California will *not* refund the difference. No joke.

Check out the link from the article. It goes to a Calif state site that discusses this.
Posted by declan00 (848 comments )
Link Flag
Will online sales survive?
If they start to tax online sales, it will slow or stop these sales?

Right now, I'm willing to purchase online if the item cost plus shipping don't exceed the item cost plus sales tax at a local store. Most of the time, I don't mind waiting a few days to get my item.

The goal is probably to force people to purchase from local stores so they get the sales tax.

I did have a hypothetical question. Does the Federal Government pay a USE TAX to the state governments on goods purchased?

Just a thought.
Posted by vanox (49 comments )
Reply Link Flag
Yes, they'll survive. Like the ATM, it's cheaper.
You said it. You'll pay up to the current price in your store. So the corporation saves the overhead of shipping it to the store near you, paying the people to operate the store, targeted marketing, etc...
They love it. You just told them they get a 20-30% increase. Yes it will survive and thrive. Call any company on their 800 number and the first thing you here is how to get to there web site. It saves them tons of money not to have call center people. No matter what cheap labor country they're in. You'll also get bombarded with advertising while you trying to fix your bill. The internet a great boon for corporations and will not go away. Just wait until they get it on your TV!
Posted by TheMidnightCoder (61 comments )
Link Flag
Shipping or Sales Tax
I shop via the web for convenience on hard to get items that most local retailers do not carry. I do not shop necessarily to save money or avoid sales tax. But, the cost of the item with shipping is the same as the cost with sales tax. Add sales tax to the Internet purchase along with shipping, and it may dampen online sales. It may drive business back to the local retailers, or, it may mean less purchases overall.
Posted by (2 comments )
Reply Link Flag
Interstate tariffs are ILLEGAL
How in the world they get away with taxing purchases made in other states when the constitution specifically forbids interstate tariffs is a mystery to me.
Posted by (52 comments )
Reply Link Flag
...because they violate the 4th amendment
Jeffrey is absolutely right, state "use" taxes are an illegal ploy to get around the 4th amendment, which forbids states from charging tariffs on goods shipped from other states. While I believe in the good things that governments do and that they should be legally allowed to collect the revenue they need to carry on their work, I don't believe in a system of law where such a huge violation of the Constitution is simply winked at and ignored. It's time for some major law schools to make it a class project to sue states over these taxes in order to affirm the Constitution. It's also time for Congress to set up a national sales tax so that even states that don't believe in paying for schools will have no excuse not to because they would have the revenue...
Posted by Razzl (1318 comments )
Link Flag
Jeffry is right doesn't anyone read the constitution?
Taxing of interstate commerce was prohibited when colonies started taxing whiskey moved from one to another and every colony wanted their share of taxes on the product passing through their respective districts. With taxes being a sore spot among the traders and commoners, it didn't take long to pass a law prohibiting taxation of goods not sold or produced in that particular colony.

Did anyone take American History? Did anyone read the text book? Does anyone remember what they read?

Greedy politicians have been around since the beginning of time. I think God made Adam and Eve and a greedy tax and spend politician at the same time.
Barb
Posted by BarbieLee (12 comments )
Link Flag
Money Making Idea
I will set up an internet kiosk at the
front of a drop ship location.
My corporate headquarters will be in Jamaica.
Customers enter the products they wish in the
kiosk. Swipe the credit card.
The order is placed with my company in Jamaica,
with Jamaica's sales taxes. A reciept for
the drop shipment is printed out and the
customer can pick up the shipment at the
will-call desk in the back.
Heck, you could rig up the scanners at the
super market to an off shore web host.
Then all your transactions occur outside the US.
Its the "internet" so no taxes on "cyberspace".
You just don't understand the "new economy".
Posted by swwg69 (48 comments )
Reply Link Flag
It's almost comical...
Obviously we are the greatest and most powerful nation in the world. To stay that way, apparently we have to beat the **** out of anyone who opposes us (Iraq etc.) {more tax}. I'm well aware of the costs of modern day infrastructure and basic technologies we take for granted (more tax). However, there comes a point where you have to scratch your head.

Try to follow a dollar of your hourly earnings before taxes. You'll be amazed at how much the government and municipalities are REALLY taking.

Remember our debt (and subsequent tax liability) when the next election comes around and at least factor it into your vote. If you didn't vote in the last election, PLEASE don't even bother typing a response to this tax issue...you haven't earned the right.
Posted by PhilZ4 (1 comment )
Reply Link Flag
Sales tax and Shipping costs
It is a bit ridiculous because NJ doesn't tax everything & many others don't either. NJ doesn't tax shipping. If you don't pay tax on the same item in the store; why do they want to collect it online? The way they talk, they want to tax everything online. They would need to do an equal tax across the board for every state. In NJ there are different sales taxes in different cities. Some are 3% and some 6%.
I think these states are being a bit too much.
Posted by daisie26 (2 comments )
Reply Link Flag
about Sales Taxes
I think the the best thing to do is to require everyone that sales software in the USA. To collect sales tax. Major players do. such as Apple.

But it should be taxed at the rate of the State the person Buying is from. Not the state the vendor is from.

If I had my rathers, I would rather it be made a federal offense to collect any tax from anyone on line. I think all use taxes should be null and void.

Sales taxes are to be collected from vendors within each state, from Businesses within that state period.

Buts since that will never happen I say have every business that does online business collect the tax and send in to the state the person is from.
Posted by pjonesCET (42 comments )
Reply Link Flag
That is the way, and the problem.
"But it should be taxed at the rate of the State the person Buying is from. Not the state the vendor is from."

This is how the states want it done. And that's one of the biggest complaints of vendors against online sales taxes--they don't want to try to navigate our byzantine tax system to figure out who in what state and what city and what suburb is paying what for sales tax on which items and whether it includes shipping and whether there are any other conditions or exemptions and where they have to send the money to and at what times and what paperwork they'll have to fill out to keep the 50 states happy.

Yes, that was a deliberate run-on sentence.

Frankly, I don't blame the vendors. I'd hate to have to be the guy to design the software to navigate that mess.

We'll have to see what the states can come up with for a "simplified tax system." I imagine this "simplification" will be to change all the rules to a completely different set of conflicting ones and will require the companies twice as much paperwork.

And I think that's optimistic. :)
Posted by (282 comments )
Link Flag
Having worked for a state government agency...
I worked for an appraisal district (values property for ad valorem taxes) for a few years, and even though it was well run for a government entity (good customer service, lean budgeting), there were practices there and a mindset that would never fly in business. There is waste, stupidity of the highest kind, and people who stayed there and was allowed to continue in their jobs because they'd been there for years. It was a depressing place to work!

Why should I feel obligated to support that type of performance and attitude? Let the government offices be held to a higher standard (though they could never reach the standards of most businesses), then we could feel like supporting them better. Ever notice how when tax revenues are short, the critical services are threatened, but the excess in government offices are untouched? In my own former agency, the CEO figure had two (and possibly 3) assistants---it helped him have someone to dump work off on that he didn't want to do.

People felt entitled and even the higher ups in the entities the district served expressed their feelings of taxpayers, and it wasn't flattering.
Posted by (18 comments )
Reply Link Flag
the Spanish government is discussing the same idea...
In some ways, I think the governments of the world are simply being their usual greedy selves, wanting a slice of everything that everyone produces, from the cradle to the grave, under the pretext of spreading the proceeds around for the common good.

I also think they may be becoming anxious at the way we are all communicating freely on any topic we want to and making friends across our borders. taxing us would be another way of exerting control over our use of the Internet. Why would they want to?

Well, how can you get people to go to war against one another, for example, once everyone knows that we are all more alike than different when it comes to the bottom line?

The tragedy is that, if they push through their taxation plans, it isn't the huge corporations or the reasonably well-off that will be forced off the Internet.

It is more likely to be the physically disabled, living on tiny state benefits and the vast mass of disadvantaged people who, in spite of being unable to get well-paid and satisfying work have, at least, found a way to be in contact with others of all walks of life on an equal basis, to feel part of a community that accepts them and recognises the value of their contribution to discussions on all kinds of topic.

The public should lobby the governments of the world forcefully to leave the Internet alone - offer to vote for whichever party promises not to tax it.

Governments already get their share of the profits from most things that people buy online as those who sell them have to declare their income in the same way as anyone else and risk getting into just as much trouble if they try to cheat the system. That should be enough.

We should colaborate to display our disapproval of the idea of taxing the Internet quickly before it is too late. We have to stop thinking there is nothing we can do and speak out in the right places to be heard by the right ears.

There's a piece of graffiti in Spanish on the wall right outside this public Internet facility that I can just about afford to use (so long as there isn't a price-hike to cover a new tax).

It says: "Anarchy is not an impossibility, it is a necessity!"
Posted by linnetwoods (15 comments )
Reply Link Flag
Perhaps I should qualify that a little...
Although you guys have focussed on the question of sales taxes, the senator who sparked off this story was, apparently, also mooting the idea of taxation of Internet usage in general and it is this idea that has captured the imagination of the Spanish government who have, so far, suggested that they might add a tax to monthly ADSL and other connections, add a tax to new hard drives (would you believe?) and/or add a tax to new computers on the assumption that they will all end up connected to the Internet...
Already they have recently brought in a tax on blank CDs and DVDs, ostensibly to dissuade people from creating pirate copies of legitimate software although, naturally, the pirates haven't batted an eyelid, simply adding the tax to the fee charged for their illegal wares.

Meanwhile, ordinary people like me, who use CDs for legitimate purposes, have to bear the added cost of this tax and cannot reclaim it from anyone.

Creating swingeing taxes that hit everyone is a poor, and lazy, substitute for tracking down fraudsters and criminals and making them pay the price.
Posted by linnetwoods (15 comments )
Link Flag
How's about some old-thinking solutions?
All over the U.S. states have been in a race to the bottom in giving tax incentives to businesses trying to lure them in. Rather than 50 governors meeting and deciding "we ain't gonna play that way" they continue to race to cut taxes for businesses. The way they recoup this is by taxing the fools, er, constiuents they already have.

Rather than continuing this trend by letting states impose sales taxes why don't they stop exempting and excusing businesses from their fair share of taxes?

It's been my experience with one municipality that they gave tax incentives to a company to move into a building then the company operated for a few years in that building and moved out before they would be eligble to be taxed on that property. In other words, they got a free ride on the backs of the citizens of that municipality. They got all the services the city offered during that time without paying into the pot. When it was nearly time to start paying they just found another sucker city to move to and skipped out without ever paying taxes to the city.

The services provided were then paid for by the people who got screwed twice by this little trick.

Let's STOP giving buisness a free ride. If, as some argue businesses have a right to free speech as if they were citizens then how come they get out of paying taxes by playing off states and municipalities against one another?
Posted by (16 comments )
Reply Link Flag
The whole tax system is wrong
There's an old adage about not burning a candle at both ends. With both an income tax and a sales tax the government has already lit both ends of the candle. With property taxes, use taxes, tolls, fees and the like they've also lit several places in the middle of the candle as well. And finally with the inheritance taxes they take the remains of the candle too.

The whole tax system is upside down, the largest consumer of the tax revenue you pay should be the local goverment with the percentage of taxes decreasing for each taxation level beyond the local and the federal government should consume the least part of the revenues. But we've allowed the federal goverment to consume the largest part and then dole it back out to the local goverments (as long as they do what the feds want).

The local polititions are the most accessible and accountable to their constituency while the federal polititions are the least accessible and accountable (look how hard it is to get rid of a member of Congress). The locals though are much less effective since they have the least to work with, not good at all.
Posted by aabcdefghij987654321 (1721 comments )
Reply Link Flag
Sales Taxes and Company Taxes
What every state fails to mention, and what every reporter never asks, is that when the state that "does not collect sales tax" the OTHER state where the company did buisess DOES collect tax - income tax from the people working there, business tax, property tax.

Now when people mail order from California businesses, which the article mentioned is worried about 200 million is lost sales tax, the state THERE now gets income taxes from the people working there, business tax, property tax, environemental tax, gas taxes, vehicle taxes and a whole slew of OTHER tax income from those businesses when people NOT in California buy from companies. Does California rebate the taxes in porportion of the sales that went outside that the company paid to the company in poportion to the products that went outside to the businesses?

No.

Sales tax is an inherit non-accountable tax - since no one individual can complain about it, no accountabliity of what the money is being used for - which is why states LOVE IT - no and auto inflation indexed - plus our whole economy is CONSUMPTION BASED which means the state will ALWAYS get "free money" forever and the percentage paid out in consumption always is higher than any other expense other than house. Which means a state effectively taxes 25% to 75% of your income AGAIN after state income tax.

Next, will these states demand we collect VAT from Canada, England, the European Union? Get the WTO to enforce these collection of taxes also (since we are part of that, we are BOUND to their rules, if they want a rule like this, they CAN enforce it.)

No, the states already EARN money from all the taxes on the companies, telling people to pay sales taxes to out of state or instate is just an excuse for badly run governments who spend beyond their means who fail to deal with reality by having too many "feel good" programs running that people do not want or use who are FORCED to pay for them.

Tom Philo
<a class="jive-link-external" href="http://www.taphilo.com" target="_newWindow">http://www.taphilo.com</a>
Posted by taphilo-2003685639374287843630 (130 comments )
Reply Link Flag
Sales Taxes and Company Taxes
What every state fails to mention, and what every reporter never asks, is that when the state that "does not collect sales tax" the OTHER state where the company has their business DOES pay tax - income tax from the people working there, business tax, property tax, and a slew of others.

Now when people mail order from California businesses, which the article mentioned is worried about $200 million is lost sales tax, the state THERE now gets income taxes from the people working there, business tax, property tax, environemental tax, gas taxes, vehicle taxes and a whole enclypoedia of OTHER taxes from those businesses when people NOT in California buy from companies. Does California rebate those taxes in porportion of the sales that went outside the state back to the company?

No.

Sales tax is an inherit non-accountable tax - since no one individual can complain about it, no accountabliity of what the money is being used for - which is why states LOVE IT - plus auto inflation indexed - add in that our whole economy is CONSUMPTION BASED which means the state will ALWAYS get "free money" forever and the percentage paid out for consumption goods and services always is higher than any other expense other than a house payment. Which means a state effectively taxes 25% to 75% of your income AGAIN after state income tax.

Next, will these states collect VAT from Canada, England, the European Union? If they demand taxes from out of state why not have other nations demand their VAT taxes from US states for goods shipped from / to their nations? If they got the WTO to enforce these collection of taxes also (since we are part of that, we are BOUND to their rules, if they want a rule like this, they CAN enforce it.) People in California paying Canada tax for items purchased from Canadian pharmacies would balance Canadas budget alone.

No, the states already EARN money from all the taxes on the companies, telling people to pay sales taxes to out of state or in-state is just an excuse for badly run governments who spend beyond their means who fail to deal with reality by having too many "feel good" programs running that people do not want or use who are FORCED to pay for them.

Tom Philo
<a class="jive-link-external" href="http://www.taphilo.com" target="_newWindow">http://www.taphilo.com</a>
Posted by taphilo-2003685639374287843630 (130 comments )
Reply Link Flag
 

Join the conversation

Add your comment

The posting of advertisements, profanity, or personal attacks is prohibited. Click here to review our Terms of Use.

What's Hot

Discussions

Shared

RSS Feeds

Add headlines from CNET News to your homepage or feedreader.