Since 2018, states have been proposing and enacting sales tax guidelines for retailers who sell remotely.
How remote sales taxes affect the places you shop online is probably not top of mind for most people. In the United States, there is no national sales tax. Instead, states have the authority to impose their own sales tax. In many states, local jurisdictions (e.g., cities, counties and districts) impose a sales tax. Most people don’t know that this sales tax is part of a broader “sales and use tax” on tangible personal property and (some) services.
For most things we buy, the tax is paid when you purchase it, so we all say sales tax. However, the states designed the tax regulations without regard to which side of the transaction pays the tax to the state, the seller or the buyer. The seller is the traditional way that the tax is collected and remitted. However, the user is the final destination of the product and thus gains the most benefit from it.
Technically, if you purchase an item in another state, you should notify the state the item ends up in and pay applicable “sales and use tax.” Generally, we experience this if we buy a car in another state and then license it in our state of residence (and pay sales tax on the transaction). Still, we don’t think about it when we buy a computer or a fridge in another state and bring it home.
There is no national standard rate for sales and use taxes. Sales or use tax rates vary by state, ranging from 2.9 to 7.25 percent at the state level, with additional taxes imposed on certain items. Five states have no statewide taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Some of these states do have local taxes.
For most people in the U.S., how taxes were collected and determined was based on “physical presence” for most of our lives. A company had to have a physical presence in a state (location) for them to need to collect the sales and use tax. So pre-internet, if you bought a shirt from a mail-order catalog company that did not have offices or a warehouse in your state, there was no sales tax.
That all changed in 2018 with the U.S. Supreme Court decision “South Dakota v. Wayfair.” That decision transformed how states could enforce sales and use tax. The “physical presence” rule is no longer the only way states can determine who needed to collect sales tax. Now states are using metrics like the number of sales and dollar value of sales that come into a state. They are also creating laws that have creative ways of determining who is “operating” in each state. Most of this is due to an increase in sales into states via the internet.
Due to the Supreme Court case and states looking for more income to help with their growing budgets, more and more people see sales tax on their invoices and bills from online vendors. Some sellers are choosing not to sell “into” certain states with lower taxable thresholds, or are not shipping items, rather requiring pickup onsite from designated locations. That is why when you go to check out of some online stores, they may not offer to ship. If traveling out of state, shops may not offer to ship items for you.
Although it may seem like a business could easily company with the laws, it isn’t obvious to determine what is taxable and what is not. It is estimated that there are more than 10,000 taxing jurisdictions in the U.S., and how a simple thing like yarn may or may not be taxed is not as straightforward as it may seem.
Taxes on remote sales are still developing and ever-updating. If you shop online, or if you have a small online business, you should be checking to see if this decision may impact you.
Find more information on South Dakota v. Wayfair and remote sales tax.
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