Internet Sales Tax Basics
Notice that the controversy isn’t about whether online shoppers ought to pay sales tax. Of course they have to pay sales tax. Online shoppers are supposed to calculate up the amount of tax they owe and pay it as a use tax to their states.
Legally, this isn’t a controversy. It’s just one of those things that people are supposed to do and don’t. It’s so hard to enforce this particular law that nobody even attempts it. Sure, if you order a fleet of airplanes online someone might get around to it, but nobody is coming to the door in April asking taxpayers to sit down and remember all the books and fruit baskets they bought all year. So taxpayers simply ignore the rule. In 2001, U.S. e-commerce accounted for some $11 billion dollars in sales, In 2012, it was over $54 billion. People still spend more in physical stores than online, but online spending is increasing at a startling rate. States are losing out on a lot of revenue, and they’re not happy about it. What’s more, brick and mortar businesses feel that online stores have unfair advantages when consumers essentially get to shop tax-free. Small businesses feeling the pinch from an unsettled economy and having to compete with big box stores are also in competition with online stores.
Consumers believe they get better deals online, and they know they don’t have to pay sales tax — many don’t even know they’re supposed to pay use tax. It’s much easier to collect sales tax from one store than from that store’s hundreds of shoppers. Online stores, however, are required to collect taxes only if they have a physical presence in the state. So the small business with one store in Texas has to charge sales tax for sales n Texas — but not in any of the other states. (There has been controversy over exactly what constitutes a physical presence in a state and we’ll write more about that later.) Brick and mortar stores might be upset by sales tax loopholes that give e-commerce stores an advantage, but online sellers don’t have it so easy either. That small retail business in Texas is fine collecting and filing sales tax in Texas, but how are they supposed to collect taxes in every state? They don’t know the tax rates and filing everywhere is a daunting proposition.
In fact, some small online retailers claim that they would have to go out of business if they began collecting sales taxes. Sales Tax Datalink has the answer, actually, in FileLINK, our flagship product.
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