This is probably something I should already know. But what is all this about:
(place state here) residents must pay 7.5% sales tax.
I see this on Ebay quite often and some mail-order catalogs. I know that whatever state it may be is where there located. Is this a law? Why don’t people from other states have to pay?
I assume that these are sales by businesses. You will see the same sort of thing with catalogues.
The reason is that the business only has an obligation to collect taxes owing for transactions completed within its state. Another way to put it is that a state can only tax a transaction completed in that state and they can’t force an out of state company to collect taxes for them.
In reality the transaction is still taxable in the state you live in but the business doesn’t have an obligation to collect it on their behalf. You are supposed to pay the tax but no mechanism is in place and no realistic expectation exists that you will.
As for the reason, the US Constitution puts the power of regulating interstate commerce in the hands of the US legislature. This was reinforced by the US Supreme Court back in 94, when Quill was held not be to liable to South Dakota for sales tax collections because Quill had no physical presence in the state of South Dakota. In addition, the Court stated that Congress had the authority to allow states the power to tax these businesses, but up to now, no action has been taken. Therefore, the states have no authority to require businesses outside their borders to collect tax unless the business has a physical presence within their borders.
However, Congress is looking at granting states more authority, so long as the states agree to simplify their laws (one single rate, no local rates) and exempt businesses with less than $5 million in annual sales. They’ve been trying this for the last five or six years and have had no success so far, but the popularity of internet sales may sway the legislature this year.
There is one caveat to this: be wary of large out of state purchases.
A friend of mine lives in South Bend Indiana and went across the boarder to Niles Michigan to purchase a couch. The furniture dealer did not see an obligation to collect Indiana sales tax cause he was based in Michigan, and since delivery was to Indiana he did not see an obligation to pay Michigan sales tax.
The State of Indiana basically waited for my friend to complete his Income Tax form. Like many people, he didn’t list the couch under “use tax” (Indiana and several other states require you to pay Indiana sales tax for out of state purchases in which a sales tax was not collected – this is added to the state income tax payment due). When the State of Indiana discovered he didn’t pay the use tax on his couch, they hit him with a whopper of a tax bill.
Granted, states do not have the resources to track every little purchase you make out of state. However they do pay attention to large ticket items in which tax was not collected.
Missouri has had a similar form in their state tax forms for about two years now. Of course everyone I know completes the form and pays the use tax.
What I’m not getting is in the case of an individual, how whould they know about out of state purchases?
In the case of a car or other item that had to be registered with the state, no problem, they’ve got you. But how did Indiana know that RainbowDragon’s friend had bought a couch?
The only time I paid sales tax for online purchases was when the comp also had a store in my state even though the auction site store was in another state.
The company has to have a “business presence” - not necessarily a store (could be just an office) - in order to be obligated to collect sales tax within that state.
RainbowDragon: How did the state of Indiana know your friend had bought a sofa out of state?
Just because you don’t have a business presence in a particular state, does not prevent a state from performing an audit. They may want to audit and make certain your business in not operating a nexus (presence) in their state.
First, remember this furniture store was basically on the Indiana-Michigan border. So it is a fair assumption that Indiana customers would frequent the business and might spend a lot of money. I would think it was a fair target for an Indiana auditor to frequent.
I don’t know if the furniture store put up a fight. I would assume the store cooperated with the auditor and allowed the auditor to get a listing of names, addresses, and purchase amounts for those Indiana sales that had no tax collected. The auditor more than likely punched the info into a computer so that when Indiana income taxes were filed, they could see who paid their use tax.
Apparently customers were less than happy with the furniture dealer, and they decided to change their policy and collect Indiana sales tax even through they had no presence in Indiana. Just to make sure that customers like my friend don’t get sacked again.
Certain states have been greedily eyeballing Internet commerce as a lucrative source of revenue for some time now. Right now, however, Congress’ role in overseeing interstate commerce seems to be preventing them from cashing in. I do not know the exact mechanism which does this, but I think part of it is somehow tied to the temporary moratorium on federal Internet taxation.
But I know it’s one reason why the National Governor’s Association quietly supported H.R. 3125, the Internet Gambling Prohibition Act (you can check out the bill by copying the title into the search bar here). The way that bill was structured, it opened the door for states to stick their noses deeper into interstate commerce than they currently can, ostensibly for enforcement purposes. Critics of the bill pointed out that the leeway granted could eventually be pried open by case law to allow states to begin imposing taxes on commerce originating, terminating, or even electronically passing through their territory. Having attended several hearings on this bill, I can say without hesitation that the argument passed over Congress’ heads like a Sammy Sosa homer.
If you want to see the real death of profit on the Internet, just imagine a worst case scenario, where a purchaser in Florida buys a product in Alaska over the Internet and gets taxed by every state that had a data packet pass through their turf.
Sounds stupid, right? Don’t underestimate Congress on that score. A majority of House members voted for the bill last year, but since it was being tacked onto an appropriations bill as a rider, it needed a two-thirds vote to be included. A similar bill has already been introduced in the 107th Congress.
Greedily eyeballing Internet commerce as a lucrative source of revenue? Or, perhaps, warily watching the sales tax base erode, and wondering how to fund welfare, schools, roads and everything else?
Senator Dorgan has had a bill in the last several years authorizing the states to require the collection of the sales tax on sales to their states under certain circumstances. Go here for a look at how the states have attempted to address the problem. The National Conference of State Legislatures has hijacked the project and stripped the few substantive bits of the agreement. They’ve cut off their noses to spite their faces, and pretty much destroyed any chance the states have to influence the outcome.
The Michigan furniture dealer was obligated to collect Indiana Sales Tax because the dealer deliverd the merchandise to Indiana. If the customer had contracted a 3rd party to pickup and deliver the merchandise, the store is off the hook. Only Michigan law would determine whether the store should have collected Michigan sales tax. Many state laws exempt sales tax for merchandise that is immediately exported.
I suspect that the Indiana Revenue department saw the Michigan truck in making a delivery in Indiana and took action at that juncture.
Indiana because of it’s location (Remember Chicago, Cincinnati and Louisville Metro Areas extend into Indiana), keeps a keen look out.
They are really aware that many of their residents cross the border to work and to shop.