Chances are, you’re planning on doing a little online shopping tomorrow. Sales on Cyber Monday are expected to haul in $3.81 billion in sales – that’s up from $3.45 billion. And those numbers don’t even include those “Cyber Monday starts now” sales which kicked in over the weekend.
Those billions? They make retailers happy. But state and local taxing authorities? Not so much. That’s because many of those dollars will escape sales tax – though not for lack of trying. Currently, 45 states, together with the District of Columbia and Puerto Rico impose a sales tax on various goods or services at the state level. Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a state sales tax, though some counties and other localities in those states do impose a sales tax.
(For now, those sales taxes may be deductible on your federal income tax return. You can read more about the sales tax deduction here.)
Of course, despite the rules on the books, sales tax doesn’t always show up on your online receipts. That doesn’t mean that the transaction isn’t taxable: It means that the retailer isn’t collecting sales tax.
Retailers may not collect for a number of reasons. Chief among them? Reliance on case law (notably, National Bellas Hess, Inc. v. Department of Revenue and Quill v. North Dakota) that requires a retailer to maintain a significant physical presence (sometimes referred to as nexus) inside a jurisdiction to be held responsible for collecting the tax.
But that’s not the end of the story. Every state that imposes a state sales tax also imposes a state use tax. A use tax is the taxpayer’s equivalent of the sales tax. It’s imposed on goods that would otherwise be taxable inside a state for “use, storage, or consumption” when sales tax has not been paid. In other words, if you buy something that wasn’t taxed when you live in a state which does impose a sales tax, you owe the tax anyway. For example, if you buy something over the internet from a retailer who isn’t required to collect the sales tax, you may still owe the tax to your state. Instead of paying the tax to the retailer (as you would in a physical store), it becomes your responsibility to figure and remit the tax to the proper authorities.
(You can read more about online shopping and tax here.)
If that sounds like a hassle, it is. That’s why most consumers just ignore the use tax – though not necessarily on purpose. A 2015 poll conducted by the International Council of Shopping Centers (ICSC) found that 62% of registered voters were not aware that use taxes were payable (downloads as a PDF). Most of those polled felt that the best way to collect sales tax was at the point the sale is made – and not by asking consumers to self-report and pay.
Thankfully, some online retailers are making it easier for consumers by collecting tax at the point of purchase. This year, most shoppers heading for sales at the top Cyber Monday destination, Amazon.com, won’t escape sales tax. For years, Amazon traditionally balked at collecting sales tax in most states, even going to court to fight collection efforts. However, earlier this year, Amazon announced that it would begin collecting sales taxes from all states with a sales tax.
Just because Amazon will be collecting sales tax doesn’t mean that all online retailers will collect tax. And if you shop online at a site that won’t be collecting sales tax, you don’t get a pass: You’re still responsible for paying the use tax. So how do you do it?
Some states – like Massachusetts – make it easy by offering a line item on your income tax form for reporting. Other states – like Washington – make you work for it by requiring a separate form (downloads as a PDF).
Form or no form, ultimately it’s up to you to check the laws in your state to figure it out. Not too efficient (or likely), right? That’s why billions of dollars in sales and use tax revenue goes uncollected every year. An analysis of retail sales suggests that more than $25 billion in sales and use tax goes unreported – and unpaid – annually (downloads as a PDF).
As those dollars sky-rocket, boosted by the popularity of online shopping, states are desperate to find ways to capture that revenue. Colorado successfully passed a new law requiring retailers to report more information about sales; after the law survived legal challenges, it’s likely that you’ll see similar reporting rules pop up in other states. And while Massachusetts yanked a new rule requiring out-of-state online retailers to collect sales taxes before it went into effect, you can expect a tweaked version.
If all of this leaves your head spinning, you’re not alone. Sales and use taxes are some of the most confusing taxes on the books and they aren’t getting any easier to understand. Click (and spend) carefully.