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Internet Sales Taxes Eyed by States to Raise Funds: What This Means for You

It looks like the economic downturn may mean an upswing for taxing internet sales. The AP reported today that, as states feel their budgets being increasingly squeezed by the current recession, they may turn to taxing online sales to help stem their woes. An analyst from Forrester Research estimates that if Web retailers had to collect taxes on all sales to consumers, it could generate $3 billion in new revenue for governments. Even though this represents just a drop in the bucket as far as states' total budget deficits go ($89B according to one measure), some states have been looking for ways to tax such sales for quite a while.

Under current laws, if an online retailer has a "physical presence" in a given state, it must collect sales tax from customers in that state. Physical presence usually includes things such as business and sales offices, warehouses, etc. This is where some states, such as New York, are stepping in and redefining "physical presence" so as to impose a requirement that out-of-state Web retailers must collect taxes on shipments to New York residents, even if the companies are physically located elsewhere. So what does this mean for those of us who love the joy of finding that obscure internet deal, and better yet, getting it at the price we first saw on the screen?

At this point, the primary impact of this move would be felt by out-of-state retailers doing business on the Internet. Somehow, affected retailers will have to figure out each state's own laws addressing online sales, and then implement the taxes into their online sales systems in order to pass on the tax to the correct consumers. It should be noted that New York has been sued by the online retailer Amazon.com over the constitutionality of the tax law, raising the argument that it has no employees or physical presence in the state and should remain untaxed.

However, one analysis suggests that consumers are not going to be happy paying taxes on their Web purchases, although the same people probably don't give enough weight to other advantages such as "traffic, cost of gas, etc., the time and convenience" of shopping online. Consumers should keep in mind that they aren't supposed to get away from taxes on their online purchases Scott free, either. Consumers are supposed to report taxes on their online purchases as a "use tax", but it looks like states are realizing that the people who sit down and spend some serious time tallying up their year's worth of online purchases and taxes are in the minority.

The legal landscape over the internet sales tax issue is still a ways from being cleared up, but consumers should keep an eye out for developments in their state's tax laws, and perhaps a sharp eye on line items when "checking out" to make their online purchases.

• AP: Buying on Web to avoid sales taxes could end soon (AP)
• Wall Street Journal: Amazon Sues New York State Over Tax Law
• Tax on Internet Sales (FindLaw)
• FindLaw's Tax Center
• New York Senate Teases Amazon Customers With Sales Tax Repeal (NY Times - Bits)
• Amazon vs. NY State: Online Sales Tax and the Consumer Perspective (JupiterReasearch.com)
• Consumers are indifferent to online sales tax, reports Jupiter Media Metrix (Internetretailer.com)

Full post as published by FindLaw's Common Law on January 12, 2009 (boomark / email).