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US States Working Harder to Collect Online Sales Taxes
email this pageprint this pageemail usAlex Johnson - msnbc.com
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September 19, 2010



In many states, residents who buy online are expected to complete complicated forms, like this one from the South Carolina tax return, and voluntarily send in sales and use tax payments.
It’s too early to know exactly how much the Nebraska chapter of the March of Dimes raised this week at its annual Signature Chefs Auction in Omaha, but odds are that more than 10 percent of the charity’s proceeds are going straight to the tax man.

That’s because the March of Dimes went online when it bought about 4,000 T-shirts from a Florida vendor to give to donors during its March for Babies Walk last April. The charity often buys supplies and other materials online, and it also raises money online by selling items at auction — racking up a big tax bill in each case.

“We didn’t know that,” said Rosemary Opbroek, director of the Nebraska chapter. “We wish the law was different. It is taking money away from helping ... babies.”

Specifically, it is taking away about $26,000, the amount the State of Nebraska says the March of Dimes owes for unpaid taxes on the April purchase and other online transactions over the past five years.

Opbroek acknowledged that “we owe the money,” which she said would have to come out of proceeds from this week’s fundraiser. Assuming the final tally is the same as last year’s, about $215,000, the state tax bill will eat up nearly 13 percent of the donations.

The law the March of Dimes stumbled over is similar to statutes in most other states — arcane regulations that mean you are probably a tax scofflaw, along with just about everybody else who has bought something online. That’s roughly 80 percent of all U.S. adults, Nielsen Online calculates.

The reasons are complicated, because they involve variations in tax codes in the 46 states (plus the District of Columbia) that collect sales taxes, not to mention thousands of local tax regulations across the country. That leads to confusion even among advocates for or against enforcing existing tax policies on online purchases, which are often misleadingly characterized as attempts to “create” a new “Internet sales tax.”

Sales taxes or similar levies have always been in place on most online purchases in most states. But they are almost never paid. And with their budgets in crisis, states are more determined than ever to get their share.

Do you have a ‘physical nexus’?

The confusion boils down to who does the collecting and when. As with everything involving tax legislation, there are exceptions and other complications from state to state. For example, if you live in Delaware, Montana, New Hampshire or Oregon, which have no sales taxes, none of this applies.

Under a 1992 Supreme Court ruling, businesses are responsible for collecting sales taxes on every sale they make in a state where they have a “physical nexus.” In other words, if the business has a store, an office or even a single sales rep in your state, it’s supposed to tack the state’s sales tax onto your bill.

Online retailers like Amazon.com typically don’t add the tax, except in the states where they’re based or where they have physical facilities like warehouses or distribution centers. Amazon, for example, collects sales taxes only in Washington (its home state), Kansas, Kentucky, North Dakota and New York.

The tax is still supposed to be paid, however. And if the seller’s not responsible, then you, the buyer, are. In general, you’re supposed to voluntarily file your own report and pay the standard tax on your out-of-state online purchases. (The appropriate forms are available on state tax agency websites, revenue officials are happy to remind you.)

But it turns out that the vast majority of Americans are completely unaware of those rules, so the forms don’t get filed and the taxes don’t get paid — to the tune of $8.6 billion in 2010 alone, the National Conference of State Legislatures estimates.

That’s a big problem, because sales taxes (as they’re called when they’re handled by a retailer) and use taxes (as they’re called when the customer handles them after an out-of-state transaction) most often pay for schools and public safety.




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