Sales Tax for the Internet?

Post Published on April 16, 2011.
Last Updated on April 24, 2016 by davemackey.

Tax (Photo credit: 401K)

A subject of controversy for years has been whether internet sales should be taxed (or not). Currently, if you purchase an item from an out-of-state seller you do not pay sales tax on the purchase. This follows a similar practice that has long held true for mail-order catalogs across state boundaries.

On a regular basis the states attempt to implement sales tax laws for the internet, the federal government establishes moratoriums on some of these taxes, and various businesses (most notably Amazon) go to battle with states over whether or not affiliates count as a business presence in a state and thus whether they are responsible for collecting sales tax.

Theoretically, folks should still be paying sales tax on items they purchase – if that item hasn’t already had sales tax charged. This is called a use tax, but the law is generally unenforced and would be extremely difficult to enforce – should the states decide to do so. Instead, it relies upon individuals submitting use tax forms to the government along with a check in the amount of the sales tax that should have been charged.

I’m a big tech/internet geek and stereotypically this would mean I oppose internet sales taxes and support a tax moratorium – but that isn’t the case. I figure sales taxes for the internet is just a matter of time – so here is how I would recommend the federal government handle the issue:

  1. Payment gateway providers are already used by all websites making sales to process these payments in electronic form.
  2. It would be fairly simple to either (a) have the payment gateway providers do the processing of sales tax or (b) create a similar process which would integrate in a similar manner with sales websites.
  3. When an individual makes a purchase this federal integration component would note the shipping destination and report back to the sales site how much sales tax should be appended.
  4. Once the order is placed and the customer charged, the sales tax would be transferred into the account of the above noted state.
  5. The end.

This is a really simple process for accomplishing internet sales tax. It requires minimal effort (a few lines of code changes) for the selling company, no changes for purchaser (except for paying the sales tax), and minimal overhead for the federal government.

Here are a few concerns that might arise (in my mind) and my proposed solutions:

Is it fair that the destination state receives the sales tax instead of the state in which the item was purchased? I’m not sure it is fair, but it is simple – and, generally speaking, it should all even out.

Won’t people stop purchasing online if sales tax is collected? I can’t speak for everyone, but the prices one receives via internet purchases are generally better than those made from local sales – whether or not the sales tax is included. Further, it is a matter of significant convenience to have a product shipped to your door rather than going out and purchasing it. I wouldn’t expect a significant decrease in sales.

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