If you shop online tax-free, are you being a tax cheat?
Sarah Davis, co-owner of Fashionphile.com, poses with her bags in a company warehouse in Carlsbad, Calif. The Internet company sells rare, vintage and discontinued previously owned bags and is facing the complicated task of dealing with new state regulations on Internet sale taxes.
Buy anything on the Internet lately without paying sales tax? In all but a few states, you’re probably a tax cheat.
That’s right, even if Internet retailers don’t collect sales tax at the time of the purchase, you’re required by law to pay it in 45 states and the District of Columbia.
Here’s the problem for states: Hardly anyone pays the tax, and there’s not much states can do about it. The Senate is expected to pass a bill today making it easier for states to collect sales taxes for online purchases. Some of the nation’s largest retailers are rejoicing. But small-business owners who make their living selling products on the Internet worry they will be swamped by new requirements from faraway states.
“It’s a huge burden for a company like ours,” said Sarah Davis, co-owner of Fashionphile.com, a California-based company that sells high-end pre-owned handbags and purses. “We don’t have an accounting department, we’ve got my father-in-law.”
Davis started the company in 1999 and runs it with her brother-in-law. They have 26 workers and three stores, in Beverly Hills, San Diego and San Francisco. Last year, Fashionphile.com did $10 million in sales, the vast majority of it online, Davis said.
Fashionphile.com sells bags directly from its website and on eBay. The company collects sales taxes from customers who live in California, but not from people who live in other states, Davis said. Under the law, states can only require stores to collect sales taxes if the store has a physical presence in the state.
That means big retailers, such as Walmart, Best Buy and Target, with stores all over the country collect sales taxes when they sell goods over the Internet. But eBay, Amazon and other online retailers don’t have to collect sales taxes, except in states where they have offices or distribution centers.
As a result, many online sales are essentially tax-free, giving Internet retailers an advantage over brick-and-mortar stores. But the purchases aren’t tax-free under the law.
In states with sales taxes, if you buy something from an out-of-state retailer and don’t pay taxes, you are supposed to pay those taxes when you file your state tax return, said Neal Osten, a director with the National Conference of State Legislatures.
Unpaid sales taxes are usually referred to as “use taxes” on state income tax returns. Use taxes apply to purchases made over Internet, from catalogs, television and radio ads and purchases made directly from out-of-state companies. State officials, however, complain that few people pay these taxes, Olsten said.