The ABCs of Online Sales Tax

A reader sent in the following question to me recently in regards to sales taxes on online sales:

"I buy a lot of stuff on the internet for my business. Recently I bought something in an online auction, and when the seller sent me his invoice, he added my state's sales tax to my winning bid. I thought this was odd, because the seller's located in another state and I didn't think you had to charge sales tax on interstate sales. Is there something going on here I should know about?"

Generally, when you're selling stuff--online or otherwise--you charge sales tax only when the buyer is located in the same state as you. Under current law, which may be changing soon (see below), you're not supposed to charge sales tax on sales to buyers who live in other states.

There are two exceptions to this, however, and your seller probably fell into one of them:

First, if the seller has an office, warehouse, distribution facility or retail location in your state, the seller may have to charge you sales tax because he is legally "doing business" in your state. This is why, when you buy something from a mail order catalogue, the invoice form sometimes says "residents of States A, B and C, please add sales tax to the total." The mail order company has its retail or warehouse outlets in States A, B and C and is required to collect sales tax from buyers located in each of those states, regardless of the actual location your order is shipping from.

Second, a growing number of states are entering into "compacts," or agreements, encouraging in-state sellers to collect sales tax from buyers in neighboring states. New York and Connecticut have such an arrangement, while eight Midwestern states have banded together to create the Midwest Border Tax Compact. The idea is that by charging your buyer state sales tax, you're helping the buyer avoid liability for "use taxes" on stuff they buy from out-of-state vendors. (In just about every state, the sales tax and use tax are the same rates and are calculated the same way.) How thoughtful of them!

If you live in a state that has a reciprocal sales tax agreement with another state, you're required to collect the other state's sales tax, pay it to your state's Department of Revenue--with a special tax return form--and then hope and pray they remit the tax to the other state government (of course they will, won't they?).

So why haven't you heard about this before? Up until recently, most states that have sales tax agreements with other states haven't been too aggressive about enforcing them. Why, you ask? Now, I'm not a politician, but I suspect it's hard to convince voters their tax dollars should be spent to help another state collect its tax revenue. There are also a few U.S. Supreme Court rulings that prohibit states from imposing sales taxes on interstate commerce, whether directly or indirectly, and no state official wants to be accused of violating federal law. But, as I mentioned above, the law may be changing soon.

Every few years, a bill is introduced in Congress, which would permit states to levy taxes on sales made over the internet, among other things. A majority of states have signed onto the Streamlined Sales Tax Project or SSTP, which is basically a national "reciprocal tax agreement," and are awaiting the "green light" by Congress to put the SSTP into effect. The bill, which was previously voted down, is being reintroduced in Congress this fall and stands a better-than-average chance of getting passed this time around.

If the SSTP passes Congress, then internet sellers of all kinds--including people putting stuff up for sale on eBay and other Internet auction sites--will have to charge state and local sales taxes at the rates in effect wherever their buyers are located. With more than 7,500 sales tax jurisdictions in the United States, complying with the SSTP will impose a crippling paperwork burden on many small e-businesses that can't afford to hire teams of people or buy expensive software packages to help them comply.

A number of e-commerce companies and grassroots organizations are lining up to fight the SSTP. For example, eBay's government relations department has set up a special website where you can sign up for e-mailings notifying you of the bill's progress. You can also sign up to receive "form letters" you can send by e-mail to your elected officials to let them know the impact the SSTP will have on you.

Of course, your seller may simply have been mistaken in charging you sales tax. Call him and find out. Also, if the stuff you bought from him is inventory you're planning to resell, you shouldn't be charged sales tax at all. So provide your seller with a "resale certificate" and he'll almost certainly back off.