Online shoppers: What you need to know about sales taxes
— -- With CyberMonday approaching, savvy shoppers will be looking to save money on their purchases. Coupons? Check. Flash sales? Game on! Free shipping? Is there any other kind?
But here's one cost that could soon become more difficult to avoid: state sales taxes.
If you live in a state with a state sales tax — and all but five states have them — you're supposed to pay taxes on purchases, whether they are online or at a store in the mall. In reality, though, billions in online purchases go untaxed because retailers don't collect them.
In 1992, the Supreme Court ruled that retailers could only be required to collect sales taxes in states in which they have a physical presence. As online sales have surged, though, states have become more aggressive about going after this revenue. They have some powerful allies, not just in the bricks-and-mortar retailers, but in Washington.
Earlier this year, California created a furor when it enacted a law that required Web retailers with a California subsidiary or affiliate to collect sales taxes from California customers. In response, Amazon and Overstock.com ended relationships with thousands of websites that link buyers to their sites. Amazon threatened to back a referendum putting the issue to California voters but later reached an agreement to start collecting sales taxes in September 2012.
Ten other states have enacted laws that require retailers to collect sales taxes if they solicit sales through online links or through an affiliate, according to tax publisher CCH. Four others have legislation pending.
And earlier this month, a bi-partisan group of lawmakers introduced the Marketplace Fairness Act, which would give states broad authority to require online retailers to collect sales taxes, as long as they develop measures to streamline the collection process. A similar bill is pending in the House. Significantly, Amazon has thrown its support behind the bill.
The National Conference of State Legislatures estimates that uncollected online sales taxes will cost states $23 billion in 2012. "If we don't close the loophole now, it will continue to get bigger," says Neal Osten, director of the conference's Washington office.
Sales tax tips
If you're planning to shop online, here's what you need to know about state sales taxes:
•Because of the physical presence requirement, you'll probably pay sales taxes on online purchases from bricks-and- mortar retailers. "If you go to Target or Walmart or J.C. Penney, you're going to pay a sales tax because they have actual stores in your state," says Daniel Schibley, senior state tax analyst for tax publisher CCH.
•You're legally required to pay state taxes on online and catalog purchases, even if the retailer doesn't collect them. State sales taxes have two components: the sales portion paid by the retailer and a use portion paid by the consumer. If the retailer doesn't collect sales taxes, consumers are still supposed to pay the use portion.
States often charge a use tax when residents register a car purchased from out-of-state, says David French, senior vice president for government relations at the National Retail Federation. In addition, some states ask residents to disclose online purchases on their tax returns and pay use taxes on them.
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