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Will States Start Trying To Collect Sales Tax from Online Sellers?

January 13th, 2009 by Skip McGrath

New York and some other states are already moving that way. This could be a nightmare for eBay, small web site and Amazon sellers

With the recession pummeling their budgets, State governments are looking  for ways to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders. Mostly they are going after large online sellers, but if you think they aren’t targeting eBay sellers too, you are mistaken.

According to Forrester Research,  online sales will make up about 8 percent of all retail sales in 2009 and total $234 billion, This is up from $175 billion in 2007. Currently the states are getting sales tax on very little of this money. If the average state sales tax is 8%, that works out to $18.7 Billion in tax revenue the states are missing out on.

Collecting online sales taxes is not as simple as it might sound.  There are thousands of tax-collecting jurisdictions — states, counties and cities — and the rules are tangled and complex.

In 1992 a U.S. Supreme Court ruling said that states cannot force businesses to collect sales taxes unless the businesses have operations in that state. The court also said Congress could lift the ban, which remains in place — for now.

As a result, generally only businesses with a "physical presence" in a state — such as a store or office building — collect sales tax on products sent to buyers in the same state. For instance, a Californian buying something from Barnes & Noble Inc.’s Web site pays sales tax because the bookseller has stores in California. Buying the same thing directly from Amazon would not ring up sales tax because Amazon does not have a physical presence in California –but because I live in Washington State where Amazon is headquartered, I pay sales tax when I buy something directly from Amazon.

The states are currently lobbying congress to impose an internet sales tax and they are joined by brick and mortar retailers who see the internet as competition because the lack of online sales tax puts them at a disadvantage.

So there is no question this is coming –it is just a matter of time.  About the only thing small online sellers can do is contact your congressperson and point out that having to collect and pay sales taxes for all 50 states would put you out of business.

Here is a website where you can call or email your congressperson: https://writerep.house.gov/writerep/welcome.shtml

Remember, polite, well reasoned emails get read –angry emails just get trashed and no one reads them.

Skip McGrath

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