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All About Internet Sales Tax

All About Internet Sales Tax

6228-000619Fairness has been brought to the marketplace. Almost. Legislation on the ongoing debate of Internet sales tax has moved one step closer to enactment. The U.S. Senate approved a bill on Internet sales tax law Monday, which would require millions of consumers to start paying sales tax on online purchases (The Marketplace Fairness Act). Currently in the United States, online retailers who have no physical presence in any given state can ship goods to customers without collecting that state’s sales tax. Many online retailers have been criticized for not collecting the sales tax, hence the new law arising. On the contrary, if the online retailer does have a physical presence in a particular state, such as a store, warehouse, or business office, it must collect sales tax from customers in that state. This rule is a result of the 1992 Supreme Court decision, which held that states cannot force retailers to collect sales tax if they do not have a physical presence in that state.

The Proposed Internet Sales Tax Law

Senate has approved the proposal that would allow the 45 states that already charge Internet sales tax to require large online retailers to collect tax on purchases made by their residents. Keep in mind, this law would apply only to online sellers, like Amazon.com or eBay that have sales of at least $1 million in states where they don’t have physical operations, as in a store or warehouse. There is a good chance this bill will become law. While the Senate has already passed the bill, it still has to be approved by the House, and then signed by President Obama.

The Pros and Cons

EBay and other opponents of the bill argue that it is another tax increase. Given the state of the economy, the last thing we need is more tax hikes. Also, the bill’s opponents argue that requiring online retailers to report and pay tax to the thousands of states, counties and cities that have their own sales tax would cause a heavy burden on these businesses. Supporters of the bill, including Amazon.com, argue that it is not a tax increase, but simply a more efficient way to collect taxes that are already in place. The bill’s supporters also argue that by not requiring online retailers to collect sales tax, local businesses that do not collect sales tax have a competitive disadvantage. Because brick-and-mortar stores generally require more labor per sale (cashiers, stockers, managers, etc.), allowing the online retailers to have this unfair advantage actually hurts the job market.

How it Affects You

Michigan residents are already required to pay tax on any purchase of a taxable (non-food) item, whether the retailer collects the tax or not. This rule applies no matter where or how the item was purchased (including online purchases). If the seller of the product does not collect sales tax at the time of the sale, you are responsible for reporting the purchase on your state income tax return. When the tax is paid by the consumer directly to the government, it is called a use tax, as opposed to a sales tax. Despite the different names, these two taxes are essentially identical, and carry the same rate (6% in Michigan). Very few people actually pay their use tax, and it is nearly impossible for the state of Michigan to enforce. Other than as a collateral issue in an audit, the only time I have ever seen use tax actually enforced was for online cigarette purchases from out of state retailers. Consumers are supposed to declare all remote sales, including items bought over the phone and on the Internet when they complete tax returns as well as pay a 6 percent use tax. It rarely happens, since it isn’t enforced. Depending on the sales tax in your state, if this law is passed, online sellers and consumers will have to pay a sales tax on purchases made on the Internet. Remember, this Internet sales tax law would not apply to all online retailers, just some of the largest.

When it Comes to Michigan Sales Tax…

The State of Michigan is currently debating its own Internet sales tax law. Under this bill, Internet retailers would have to charge sales tax if they have warehouses or distribution centers in Michigan, or are affiliated with in-state businesses whose websites push customers to the larger retailer. This bill is much more limited than the bill that just passed the US Senate. Without the federal government passing its Internet sales tax bill, the 1992 Supreme Court decision is still the law of the land; meaning MI is prohibited from forcing retailers to collect sales tax unless they have a physical presence in Michigan. Because of the severely limited scope of this bill, Michigan’s Treasury Department estimated the proposed law would not generate much revenue unless the federal government gets involved. This could have a huge impact on Michigan’s small businesses. It could hurt and help at the same time. For example, it could hurt affiliate marketers, like small online-based businesses who have advertising campaigns with larger Internet retailers. Many of these businesses have cut ties with advertising agreements, and some have reinstated them. The new law is up in the air, and it will probably take a while to come into effect. If you are an online retailer, or know someone who is, it is important to keep up with the status of this law. If you want to talk more about it, feel free to give Ayar Law Group a call, or send us e-mail here.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.