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Cyber Monday

It’s Cyber Monday!!  The online equivalent to Black Friday and a day that’s anticipated to be the heaviest online shopping day in history, according to comScore, Inc., a leading Internet technology company that measures and analyzes what people do as they navigate the digital world. And while many of you have been perusing the Internet for Cyber Monday “deals,” my focus is on “Cyber Monday and sales taxes.”

Why? One reason is because e-Commerce/Internet Taxation happens to be a specialty of mine. And in addition to advising e-Commerce clients on tax issues, I’ve been blogging about “Internet sales taxes” for the past three plus years!  Incidentally, the first Internet sales tax post I ever wrote was for AllBusiness.com way back in July of 2010, shortly after a federal Main Street Fairness proposal was introduced. (See, “The Main Street Fairness Act: Explaining Internet Sales Taxes”, AllBusiness.com, July 24, 2010)

In addition to writing numerous articles on Internet Taxation, I keep my pulse on this topic and in doing so, have read way too many reader comments which support that folks, in general, falsely believe that shopping over the Internet is “tax-free”.

Now allow me to diverge for just a minute because I simply have to elaborate on this topic of reader comments to make a point.  As many of you might know, within the past two years, the number of states in which Amazon.com collects sales tax has exploded! Heck, at the beginning of 2012, Amazon was only collecting in five states but by January 2014, the internet retailer will be collecting in at least 15. Because there’s plenty of media coverage every time Amazon starts collecting in a new state, there’s always an abundance of reader comments that follow the media report – comments from folks that are not just downright angry…. but gravely misinformed!

And so, today I’ll be writing my annual “Cyber Monday – Taxes” post and expose the myth.  That’s right, I’ve got news for you Cyber shoppers; for the vast majority of you, those Cyber purchases you make today are NOT tax free! 

Smashing the Myth – Purchases Made Over the Internet Are NOT Tax Free

Yep, that right! One of the biggest myths about shopping online is that purchases made over the Internet are “tax free.” Here’s a statement we’ve all heard (or maybe even said), “I’ll just buy it over the Internet and save on sales tax.”

Here’s the reality – if you’ve purchased merchandise online which is taxable in your state and your Internet retailer didn’t charge you sales tax, it’s very likely that you still owe tax to your state. That’s right, unless you’re a resident of one of the five states that do not impose a state sales tax – Alaska, Delaware, Montana, New Hampshire, and Oregon – you, the purchaser, the ultimate consumer is responsible for reporting and paying the “use tax” to your state of residence.

Wait a Minute, I’m Supposed to Pay a “Use Tax”? That’s News to Me!

I’ve often heard or read comments which lead me to believe that some folks quite honestly don’t realize that their state requires them to voluntarily pay a use tax on their “tax-free” purchases. These comments take the flavor of,  “I’m supposed to pay a use tax? That’s news to me!“, or “I don’t know how (or where or when) to report my use tax“, or “What’s the difference between a sales tax and a use tax anyway?”  (Or in the case of those angry readers who don’t like Amazon collecting sales tax, “I’m being taxed to death so I’ll just buy my stuff from a different internet retailer!”  Hello, once again, you still owe the tax!)

Here’s the deal. Every state that imposes a sales tax has an equivalent “use tax”. When tax is charged on the sales transaction, it’s referred to as a sales tax. But when sales tax isn’t charged at the time of sale and the purchase is not for a tax-exempt item, the tax that is owed is referred to as a “use tax”. In general, a use tax is defined as “a tax on the use or consumption of tangible personal property in a state”. In general, the same state tax rate applies whether it’s charged as sales tax or paid as use tax. (However, a customer’s tax could be based on a different total rate in states which impose both a state rate and local jurisdiction rates, e.g., county, city, school district, etc.) Also, because a state decides what’s taxable and what isn’t, in general an item will be subject to tax (or exempt) regardless of whether it’s purchased at the store down the road or on-line.

How do you report and pay your personal use tax? If you’re a resident of a state that imposes a personal income tax (all but about seven states do), your use tax is reported and paid together with your personal income tax.  Of the states with a personal income tax, at least half include a line on their tax return for reporting use tax.  Although residents are suppose to  keep track of their “tax-free” purchases, many don’t.  So some states also have use tax tables in their instructions to help residents estimate their annual use tax bill.  Heck, even states without a personal income tax – like Texas and Florida  – have a separate form for reporting use tax.  And for those of you that use one of the popular tax return preparation software programs, I happen to know that some of these software programs specifically ask whether the user made purchases over the internet.

Alright, So Now I Know About “Use Tax”, But I Also Heard There’s a Big Push to Pass a Federal Bill That Will Make All Internet Purchases Taxable.

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About Sylvia Dion

Sylvia F. Dion, CPA is the Founder and Managing Partner of PrietoDion Consulting Partners LLC, a tax consulting firm specializing in providing State & Local Tax and Employment Tax Consulting Services. Sylvia is also a speaker and tax writer whose articles have been published in the Journal of Accountancy, Bloomberg BNA’s Multistate Tax Report and in other leading professional journals. Sylvia is also avid blogger, speaker and recognized authority on state tax issues whose work has received favorable mention in Forbes.com and is often quoted on taxes in media reports, such as Bloomberg BusinessWeek. Sylvia is also a proud Latina, is fluent in Spanish and was recently named a top 50 Accountant on Twitter (@SylviaDionCPA).


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