The Use and Sales Tax Debt on Goods Purchased Online
The tussle between internet businesses and state tax authority continues as states seek to raise tax revenues through online purchases. With the escalating states’ budget deficits reported by almost all states and as they seek to raise revenues from all means possible, the attention is now drifting to the billions of dollars conducted through internet merchandising.
State tax and Use tax
Ideally, retailers of goods should withhold a sales tax for goods sold to buyers within the same state for the states with an applying sales tax. In this case, the retailer becomes a withholding tax agent to collect sales tax from buyers and remit the tax to the state tax authorities. However, the state does not tax products sold to other states by manufacturers or sellers within a state. Sellers are also not required to withhold tax on behalf of other states. The U.S. Constitution prohibits states from taxing interstate trading and consequently, a state cannot ask an out-of-state seller to withhold a tax on their behalf.
Use tax on the other hand, is a tax that is levied to citizens of a given state for purchases made from outside the state. In other words, a state requires residents of the state to pay a Use tax for all imported goods at a rate equivalent to the local sales tax – just as if it was purchased from local merchants. Ideally, all goods bought online from sellers not situated within a state should attract a Use tax. Buyers who do not pay the use tax in states where the tax applies are acting illegally and are at risk of getting tax bills with penalties and interest.
Collecting Use tax
However, it seems that many people are not paying the due Use tax for goods purchased online from suppliers beyond the state borders. Since it is not economical for the local state tax authorities to follow up and enforce the payment of such use tax from individuals, they are now turning to the huge online merchants to try to get them to be their witholding tax agent. States are now trying to squeeze every available legal loophole to get merchants like Amazon.com to charge sales tax on their behalf. These internet merchants on the other hand, are fighting tooth and nail to avoid becoming tax collectors, as this will only make their prices more expensive as compared to smaller merchants (which is bad for business), who are not the target of these tax collectors.
The War on Amazon
In Illinois, Gov. Pat Quinn signed a law that forces all online merchants who have affiliates in Illinois to withhold sales tax on behalf of the state. Affiliates are websites that market another merchant website by forward internet traffic through links to the merchant website. Most of the large merchant businesses have affiliates throughout America and therefore, websites like Amazon are automatically cornered. Other states including California, New Mexico, Hawaii, Vermont, and Minnesota have come up with similar laws to get the online merchants to collect sales taxes on their behalf. On the other hand, Texas recently billed Amazon with $269 million for sales made within their states stating that Amazon had a subsidiary owned warehouse in Dallas.
Amazon, whose base of operation is located in Seattle, is working to fight back this war on online traders. In response to the Texas move, the merchant announced its intended closure on the warehouse and canceled any plans to have such state warehouses. Amazon has offices in Kansas, Kentucky, New York, North Dakota and Washington and collects sales taxes for sales made in these states.