A sales tax is levied on personal property or taxable services, such as a tax on the sale of a candy bar in a store. This tax is generally applied to the sale at the final point of purchase when the consumer purchases it.
A use tax is a tax levied on goods purchased outside of the taxing authority’s jurisdiction, which are then brought into the jurisdiction. A use tax applies to the storing, using, and consuming of tangible personal property. An example of this would be how a common use tax is levied on a car purchased out-of-state when registered in the state.
Each state has its own sales and use tax rate, meaning that these rates can vary considerably from state to state or even between jurisdictions. The amount of tax you pay is generally a function of the amount and value of tangible property you sell, store, or use.
Sales of tangible personal property to someone else are considered to be taxable. The exception to this would be if the sales tax laws specifically exempt it. However, service sales are considered non-taxable unless the sales tax laws specifically include that service.
Use taxes are assessed and due on personal property or service when the sales tax has not been paid. This tax is intended to discourage the purchase of products that are not subject to a sales tax.
What Are Internet Sales Taxes?
NOnline retail stores widely offer no-tax shopping, as shoppers enjoy the efficiency of online purchases and the possibility of not having to pay any sales tax. However, it is a misconception that all Internet sales are exempt from sales tax. Additionally, consumers are technically responsible for remitting any unpaid sales tax on online purchases to their state. This becomes an issue for states hoping to generate income from Internet sales.
The duty to pay the Internet sales tax is largely determined by the buyer’s location and not the seller’s location. If the business is not physically present in a specific state, it is not required to collect sales tax for sales from that state’s customers. An example of this would be how if you live in California and purchase something online from a retailer located in Georgia, you do not have to pay sales tax.
However, you must pay sales taxes if the Georgia retailer opens a warehouse or store in California. It is important to note that some companies create separate legal entities to handle their Internet business, so the consumer will not have to pay sales tax.
In 1998, the Internet Tax Freedom Act was passed, establishing a 3-year moratorium on taxing Internet access services, meaning providers of connectivity and information. The ban was extended for two more years in 2001. In 2002, 40 state governments and the District of Columbia joined together to simplify their sales tax codes to make collection easier. This created the state-led initiative, Streamlined Sales and Use Tax Agreement (“SSUTA”).
It is estimated that state governments will lose $35 billion from Internet sales this year. Other important developments include, but may not be limited to:
- 20 states, including California and New York, have modified their income tax forms which require taxpayers to declare any taxes owed on out-of-state purchases;
- As stated above, 45 states require buyers to pay sales taxes on Internet purchases, but a few states do exempt low-ticket items; and
- Some major retailers, such as Wal-Mart and Target, voluntarily collect state taxes.
Do Internet Businesses Need To Collect Or Report Sales Taxes?
Not all states impose a sales tax. An example of this would be how Oregon, Alaska, and Montana are some states that do not impose sales taxes. Whether an internet business must collect or report sales taxes largely depends on which state where they are operating.
Additionally, the sales tax requirements will also depend on which state the online customer is making their transaction in, as was previously mentioned. If the online customer is making their transaction in the same state in which the online business is operating from, then it is likely that a sales tax will be imposed when required.
Every state that imposes sales tax makes such a requirement, meaning there are no exceptions for any businesses, even if they operate solely or primarily through online shopping. However, internet sales tax requirements may be different if the customer purchases from a different state than where the online business is headquartered, known as “remote online sales.”
Remote online sales occur over the internet wherein the purchaser is located in a different state from the seller. Such out-of-state remote sales are increasingly common and can have significant sales tax consequences.
Generally speaking, the seller does not have the power to impose the sales tax on the customer who is making the transaction outside of state lines. However, the customer must pay state taxes in their state if the state requires such taxes. This is accomplished through various mechanisms, such as reporting the sale to tax authorities or paying what is known as a “use tax” on the specific product previously discussed.
In short, businesses operating online are not required to collect sales taxes on transactions made to customers who reside out of state. While this can make things much easier for online businesses when it comes time to file their taxes, many state governments believe there is a potential to lose out on considerable government revenue even though the business is located in the state.
In response, many state and local governments are revising their tax laws. As this is a relatively new development in the area of tax law, internet sales laws may be subject to frequent change.
What Are The Penalties For Failing To Pay Sales Taxes?
Failing to pay sales taxes can result in severe consequences for the business, including white-collar crime charges or fraud charges. Most white-collar crimes are prosecuted by government lawyers that work for a prosecutor’s office, which is responsible for seeking justice in its jurisdiction. Prosecutors consider the nature of the crime and information from the arresting officers’ police report when available to determine if and what charges to file.
For felonies, prosecutors may use grand juries to make the charging decisions. Grand juries are composed of 15-23 randomly selected individuals who consider the evidence and decide if and what charges should be filed. This happens while the prosecution and defense gather evidence and prepare for hearings and trials if the case progresses.
Different punishments that can be imposed for white-collar crimes such as failing to pay internet sales taxes include:
- Compensation paid to the victim;
- Community service;
- Criminal fines;
- Incarceration in a county jail facility for a shorter term;
- Incarceration in a federal prison facility for a longer term; or
- Probation.
Sentences can be set by trial juries or judges. For sentences that are imposed by a judge, the sentencing judge can consider several factors when determining the punishment, such as:
- The nature of the crime;
- Input from the prosecutor for considerably serious felonies;
- The defendant’s criminal history, or lack thereof; and
- The defendant’s social, economic, and other personal circumstances.
For federal crimes, the United States Sentencing Commission establishes standards for sentencing. The Commission recommends punishment ranges for each category of convicted defendants, and the sentencing judge must select a sentence within the guideline range. The exception would be if the judge is justified in considering the case unusual enough to deviate from the guidelines.
Do I Need A Lawyer For Internet Businesses And Sales Taxes?
You should hire an experienced tax attorney for assistance with tax disputes, especially issues associated with internet businesses and sales taxes.
Your tax lawyer can help you understand your legal rights and options according to your state’s specific tax laws, and will also be able to represent you in court, as needed, should legal action become necessary.
