Most online shoppers understand that they have to pay state sales tax when they purchase from an online seller with a physical location in their state or tax nexus. However, most online shoppers don’t realize that some states require that they remit sales tax or what is commonly called a “use tax” to their state even if the online seller doesn’t have a physical presence. Many shoppers fail to go through the steps to remit the appropriate use tax which is costing states $24 billion annually (source: National Retail Federation).
How does the online use tax work?
Technically, forty five states have rules in place which requires purchasers to remit sales tax or what is commonly referred to as a “use tax” for out of state purchases. For instance, if I live in California and purchase a product online from a seller located in Washington, that seller isn’t required to collect sales tax if they have no physical presence in my state. However, I’m supposed to send the appropriate sales tax for the purchase to my state. As you might expect, very few people go through the trouble of doing this because it’s not enforced. That may change soon as local in-state merchants are putting pressure on state lawmakers to “level the playing field.”
Are states going to start collecting?
A 1992 U.S. Supreme Court ruling states that retailers don’t have to collect sales taxes in states where they lack a physical presence. However, many states that have previously supported the ruling are beginning to change their stance. The Streamlined Sales and Use Tax Coalition has rallied almost two dozen states to implement a process making it easy for all businesses to collect and forward sales taxes across state lines. But, a bill would need to pass both houses of Congress and need support from the state to begin collections. If that occurs, many states believe they will have processes in place within three to six months to begin collections. Therefore, online shoppers should be cognizant of the fact that online purchases may soon be subject to a sales tax collected by the out of state merchant.
More questions? Browse answers or ask state sales tax questions online.
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