This holiday season, online shoppers will find more states are looking to make sure gift givers also give their state its fair share – in terms of sales tax for online purchases, according to CCH, a Wolters Kluwer business and a global provider of tax, accounting and audit information, software, and services. Last year, online shoppers spent more than $1 billion just on Cyber Monday, and online shopping this holiday season is expected to continue to grow at a double-digit rate.
“Whether people shop online or in stores, states expect them to pay sales tax on their purchases,” said Daniel Schibley, JD, CCH senior state tax analyst. “However, few online shoppers comply, unless the tax is collected by the merchant.”
Under existing laws, retailers are required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. As more sales head online, it is projected that states are losing billions of dollars annually in sales tax revenue they once collected from local retailers, and they are increasingly looking for ways to shore up their tax base.
Two ways to do this, according to CCH, are to require more online retailers to collect sales tax through broader nexus rules and to require consumers to pay the required use tax portion of sales tax. Sales tax has two parts – the sales portion paid by the retailer and the use portion paid by the consumer. Under existing rules, individuals are required to pay use tax in states with a sales tax if the retailer does not collect the tax.
State Sales Tax Collection Approaches
Overall, 45 states currently have a sales tax. This includes every state with the exception of Alaska, Delaware, Montana, New Hampshire and Oregon. The District of Columbia also imposes a sales tax.
Several states also are more aggressively enacting rules to help ensure more retailers and consumers pay sales tax, as outlined below. For a chart of state sales tax activities, click here.
Eleven states have enacted broader nexus rules that require online retailers to collect sales and use tax even if the retailer does not have a physical presence in the state but does solicit sales through online links or pays commissions to an in-state business (known as click-through nexus); or if the retailer has an affiliation with a company doing business in the state (known as affiliate-nexus laws). These states include: Arkansas, California, Colorado, Connecticut, Illinois, New York, North Carolina, Rhode Island, South Dakota, Texas and Vermont. The California, Texas and Vermont provisions are not yet in force, however. Four other states have legislation for these rules pending: Massachusetts, Michigan, Pennsylvania and Tennessee.
“Each of these laws increase the likelihood that if you live in these states, some online retailers will be charging you sales taxes when you make online purchases,” said Schibley.
Additionally, Colorado law requires retailers selling into the state but not collecting sales tax to send the state an annual reporting notification statement of everyone in the state it shipped to and the value of those purchases so that it can pursue collection of use taxes. However, a federal court in Denver has put enforcement of this law on hold for now.
Several states also require online retailers to provide explicit notifications on their websites letting consumers know about their obligation to pay their state sales tax. States with these website notification rules include Colorado, Oklahoma, South Dakota and Vermont.
States collecting sales tax also have information on their websites about how to pay uncollected use tax. Many states provide a line item on their income tax return where consumers can report the amount of use tax they owe.