Online merchants, many of them well established, boast to their customers that not only will they deliver for free, but they don’t charge sales tax except for (fill in the state). This appears too good to be true, and it is.
To this day, prospective clients still ask me if they can buy items on the internet and not pay tax? Didn’t the federal government “ban tax on the internet?” The answer to both these questions is a resounding no.
What merchants fail to mention is the corresponding Use Tax, which is the companion to the State’s sales tax. Even though a vendor does not have a collection obligation, the purchaser may still have a remittance obligation in the state where the property is used. Almost every state has a line on the personal income tax return requesting that the taxpayer include an amount of use tax incurred during the year. A return is generally not considered complete if the line is left blank; either a zero or an entry is required. Not too many of us can in good conscience put that zero in these days.
The other side of this conundrum falls on the merchant. Does he/she have a sales tax collection obligation in a particular state? The answer is getting much more complex, especially in light of expanding concepts of economic nexus. Is a physical presence in a state still required? We generally tell our clients that if you are going to take an aggressive position on sales tax collection, consider that you are paying someone else’s tax (the purchaser) plus interest and penalties. Not only that, but sales tax obligations are virtually impossible to walk away from as personal liability generally attaches to “responsible parties.” So think long and hard in deciding whether or not collecting and remitting sales tax is really giving you a competitive advantage.
Questions? For help understanding how online sales tax can affect you, please contact us.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.