Sales tax is already due on online purchases within the U.S. — but as you probably know, most online retailers don’t collect it. Why not?
It all comes back to location, location, location.
Sales tax is levied by the state, paid by state residents, and — usually — collected by the retailer at the point of purchase. The retailer then sends the sales tax collected to the state.
For most purchases, this system has worked well for over sixty years. But it becomes more complicated when the customer and the retailer are not located in the same state.
No matter what, sales tax must be remitted to the state where the customer lives. Otherwise — if, say, a retailer sends it instead to his or her own state — it’s taxation without representation. Customers are the ones who pay sales tax, and if that tax were sent outside their home states, they’d be paying taxes to support a state where they cannot vote and have no say in how those tax dollars are spent.
So a retailer who collects sales tax must be able to calculate the sales tax due for the customer’s home state and remit the tax collected to that state. No big deal when the retailer and customer are located in the same state, but it becomes more complicated for online and catalog retailers, who can sell to anywhere in the country. To collect sales tax on each purchase, these retailers need to know sales tax rates outside their own states.
Supreme Court Rulings
States have tried in the past to require these retailers to collect sales tax from their residents. Two cases ended up before the Supreme Court, both long before online shopping was a reality: National Bellas Hess v. Illinois Department of Revenue (1967) and Quill v. North Dakota (1992). In both, the Supreme Court said that a state cannot require an out-of-state retailer to collect sales tax unless the retailer has a physical presence in the state, because it would be too difficult.
Fast forward to today: Online retailers, like catalog retailers, are selling to residents of states where they have no physical presence. So the Supreme Court decisions apply to online retailers as well. If they don’t have a physical presence in a state, they don’t have to collect sales tax for that state.
Interestingly, though, the Supreme Court said in its Quill decision that Congress should really be the one to say whether states can require out-of-state retailers to collect sales tax.
Congress has declined to take up the issue until now, but most observers agree that that will soon change. In the next post in this series, we’ll look at some of the ways Congress may choose to address online sales tax and how that could transform the sales tax landscape.
About the Author
Erin Granville is Communications Editor at FedTax, the proud creators of Tax Cloud.
TaxCloud is a free, easy-to-use sales tax management service for retailers. It handles every aspect of sales tax, from calculation to collection to filing—all at no cost for retailers.
TaxCloud can be easily integrated into most accounting, order management, and shopping cart systems. It has been evaluated by states and an independent review board and has been designated one of only six Certified Service Providers in the nation.
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