Buying on the Internet .... A tax cheat?

Shopping on the Internet without paying sales taxes makes you a tax cheat in almost all states

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Buy anything on the Internet lately without paying sales tax? In all but a few states, you’re probably a tax cheat.

That’s right, even if Internet retailers don’t collect sales tax at the time of the purchase, you’re required by law to pay it in 45 states and the District of Columbia.

Here’s the problem for states: hardly anyone pays the tax, and there’s not much states can do about it.  Unpaid sales taxes are usually referred to as “use taxes” on state income tax returns.

.... Use taxes apply to purchases made over Internet, from catalogs, television and radio ads and purchases made directly from out-of-state companies. State officials, however, complain that few people pay these taxes, Olsten said.

Comment: I wouldn't even know how to file "use taxes" for Minnesota.

Can Minnesotans escape the "Amazon tax"?

The Sales Tax That Comes Back to Bite

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Time was when it was easy for citizens to avoid paying sales taxes on some purchases made online or out of state. Ebay and Craigslist wouldn't be as fun otherwise.

But skirting the law is getting more difficult. Now 24 states, plus D.C., are pricking shoppers' consciences with a special line on the tax return that requests a payment for sales taxes on any goods bought out of state, including those from online retailers—up from 20 states in 2008. Other states collect the tax in a variety of ways, some with special forms that taxpayers are supposed to fill out voluntarily. If, like many, you don't fess up, you may get a bill (see map).

States are trying to recoup some of the $20 billion or so they lose each year to online-sales-tax evasion. The gap exists for a quirky reason: States with sales taxes always have a "use tax" on items residents buy from out-of-state vendors. But a 1992 Supreme Court decision affirmed that out-of-state vendors don't have to collect the tax. It's up to taxpayers to track what they owe. Most don't.

"These rules are poorly understood and they make a lot of people mad," says Jim Eads, head of the Federation of Tax Administrators, a group of state tax officials. He points out that New Mexico even has a law on its books prohibiting enforcement of its use tax.

This year Kansas, Nebraska, West Virginia and D.C. added a line to their 2009 returns asking residents to pay use taxes, according to CCH. Many states warn against leaving the line blank and include a table of "suggested" contributions by income level. In New York, this works out to $78 for a return showing $200,000 of adjusted gross income. Items costing more than $1,000 are supposed to be handled separately.

Such piecemeal efforts will not be necessary if Congress passes a bill many states are pushing for: the Streamlined Sales Tax. States would harmonize their rules (but not necessarily their rates) and then collect tax on outbound sales and send it to the inbound state. So far 23 states have signed on, although holdouts include big ones like California and New York. Lawmakers seemed poised to pass the measure last year before they became preoccupied with health care, but the bill could return.

Minnesota Seeks "Amazon Tax"

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Minnesota has become the latest state to consider taxing consumers on internet sales by proposing the so-called "Amazon Tax." House Bill 401/Senate Bill 282 would require retailers with no physical presence in the state to collect sales tax on digital products purchased by Minnesotans and remit it back to the state.

Current federal law bars states from forcing businesses to collect sales tax unless they have a physical nexus in the state. Following New York's lead, the legislation would circumvent the intent of the lawby presuming that a company has a physical nexus if business is solicited through a third-party advertiser that is based in Minnesota.

Comment: Internet Tax Freedom Act. The Streamlined Sales and Use Tax