Internet sales tax is an issue because online retail stores widely offer no-tax shopping, with internet shoppers enjoying the efficiency of online purchases and the possibility of not having to pay any sales tax.
However, it is a misconception that internet sales are exempt from sales tax. In fact, online consumers are technically responsible for remitting any unpaid sales tax for online purchases to their state. As such, internet sales tax is also an issue for states that hope to generate income from internet sales.
A sales tax is a tax that is levied on personal property or taxable services, such as a tax on the sale of an electronic power supply cord purchased through an online store. Generally, a sales tax is applied to the sale at the final point of purchase when the consumer purchases it. However, in the case of an online purchase, some websites do not charge the consumer a tax at the final point of purchase. This often results in a failure to properly collect state taxes.
It is important to note that the state has its own sales tax rate. This means that sales tax rates can vary considerably from state to state or even between jurisdictions. The amount of tax a consumer pays is generally a function of the amount and value of tangible property that they purchase.
What Is My Responsibility to Pay Sales Tax?
As far as a consumer’s duty to pay internet sales tax, that duty used to be determined by the buyer’s location and not the seller’s location. As such, if a business was not physically present in a specific state, then that business was not required to collect sales tax for sales from that state’s customers.
For example, in the past if an online consumer lived in California and purchased something online from a retailer located only in Texas, then they did not have to pay sales tax on online purchases from California.
However, online consumers still had to pay sales taxes if the Texas retailer opened a warehouse or store in California. This is why in the past some companies even created separate legal entities to handle their internet business, in order for the consumer to not have to pay sales tax.
As internet shopping became more and more prevalent, federal and state governments took actions to capture online sales taxes. In 1998, the Internet Tax Freedom Act was passed, which prohibited state and local governments from imposing taxes directly on the internet or online activity, and categorized taxes targeted specifically to the internet itself or to online commerce as “discriminatory.”
Then, in 2002, 40 state governments and the District of Columbia joined together to simplify their sales tax codes to make internet sales tax collection easier by creating the Streamlined Sales and Use Tax Agreement (“SSUTA”). The SSUTA allowed remote and online businesses to more easily compute and remit sales tax to the states that have established a nexus.
As of 2018, there is a federal ruling that changed the previous rules surrounding internet sales, and now online businesses need to collect and file taxes in states that they ship to, not just the state that they are based in. In other words, the duty is on the online retailer, not the consumer, to collect and file taxes for online purchases.
What Are the Recent Developments Concerning the Internet Sales Tax?
As mentioned above, the rules and regulations regarding internet sales tax changed vastly in 2018. The change in the internet sales tax landscape was a direct result of the 2018 Supreme Court case South Dakota v. Wayfair, Inc. which ruled that a state may require sellers with no physical presence in the state to collect and remit sales tax for goods sold to customers in that state.
Specifically, this Supreme Court ruling overturned the previous physical presence rule that was set forth in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue cases which previously determined an online retailer’s responsibility to collect sales taxes based on the presence of the online retailer in the state of the consumer.
This ruling understandably had significant implications for online retailers, as it allowed states to now mandate that businesses without a physical presence in a state with more than 200 transactions or $100,000 in state sales to collect and remit sales taxes on transactions in the state. This resulted in states being able to collect more than $35 billion in state taxes that they were previously missing out on each year as a result of online sales transactions and ecommerce.
What Are the Penalties for Failing to Pay Internet Sales Taxes?
Failing to pay internet sales taxes within an online seller’s business tax return can result in severe legal consequences, including white-collar crime charges or fraud charges. Most white-collar crimes are prosecuted by government lawyers that work for a state prosecutor’s office, which is responsible for seeking justice in its jurisdiction.
There are many different punishments that can be imposed for white-collar crimes, such as failing to pay internet sales taxes, including:
- Compensation paid to the victim, which in the case of internet sales taxes is the state tax collecting authority;
- Community service;
- Criminal fines;
- Incarceration in a county jail facility for a short term;
- Incarceration in a federal prison facility for a longer term; or
- Probation.
Criminal sentences involving a failure to collect mandated state taxes can be set by trial juries or judges. For sentences that are imposed by a judge, the sentencing judge will consider several factors when determining the punishment, such as:
- The nature of the crime;
- Input from the prosecutor for considerably serious felonies
- For example, according to 26 United States Code § 7202, any person who is required to collect, account for, and pay over any tax imposed by the United States Code and willfully fails to collect or truthfully account for and pay over such tax, shall be guilty of a felony;
- The defendant’s criminal history, or lack thereof; and
- The defendant’s social, economic, and other personal circumstances.
Once again, the exact penalties for failing to collect and remit internet sales tax can vary depending on the state in which the taxes were not collected and remitted. In general, if an online seller does not collect and remit sales tax where they owe it, they may be subject to substantial penalties and interest on the missed taxes.
In general, an online seller can assume that civil penalties for failure to file or pay taxes will result in an interest of roughly 30% of the total amount of internet sales taxes due. As far as criminal penalties, if the online seller knowingly failed to include internet sales taxes in their sales tax returns, the criminal penalties are often severe.
Do I Need an Experienced Tax Lawyer?
If you are having any issues surrounding internet sales taxes, such as whether or not you are under an obligation to pay or collect a sales tax, consulting with an experienced tax law attorney is essential in order to ensure that you are complying with the most up to date laws on taxes.
An experienced tax lawyer can help you understand your legal rights and options according to your state’s specific internet tax laws. Further, should you be facing civil or criminal penalties as a result of internet sales taxes, an attorney will also be able to represent you in court, as needed.
