The Internet Tax You Don't Know You Owe
Thousands of Conflicting Regulations Lead to Confusion, Inconsistent Taxation Online
Sascha Segan
Special to Consumer Reports WebWatch
 |
You cheated on your taxes this year. And you probably didn't even know it.
Thanks to antiquated tax laws, the rise of Internet shopping and a complicated web of state regulations, millions of consumers may owe hundreds of dollars in state taxes for online purchases but have not been asked to pay.
States can only order sales tax collection from companies with a physical business presence -- usually an office, warehouse, or call center -- in that particular state, according to a 1992 Supreme Court decision. This makes taxation a tricky problem in the boundary-less Internet, where you can shop virtually worldwide from your home.
There is already a tax on online shopping, called the use tax -- intended to take the place of sales tax in online and catalog purchases. However, use tax laws are almost impossible to comply with, even for the most conscientious consumers, since the system is far from standardized. Online businesses are not forthright in telling shoppers about the extra tax they owe, and states don't see it as worth enforcing -- while the taxes add up, states don't have the resources to chase every individual transaction online. In the meantime, the thousands of conflicting regulations around state and local taxes make it difficult for online shoppers to understand what they owe, when they owe it, and who they owe it to.
With Internet shopping expected to reach $105 billion in sales within five years, according to Jupiter Research, states are finally getting their acts together to make online taxation as worry-free as shopping at the local mall. Officials from 32 states have taken a key step toward harmonizing their sales tax systems, a multi-year process that could result in closing the loopholes that make much online shopping effectively sales tax-free for consumers, but rob states of millions of dollars in revenue.
Anticipating the change, several large online retailers including Amazon.com, Wal-Mart, Target and Toys "R" Us started in February to voluntarily collect sales taxes in 38 states and the District of Columbia. But that doesn't mean they always get the tax rates right, and some shoppers are still being over-or under-charged. (See here.)
A Thousand and One Taxes
In 2001, $13.3 billion in sales taxes slipped out of states' hands through out-of-state purchases, according to Bill Fox, a professor at the University of Tennessee and author of a 2001 study on the issue. Some of that money would have gone to catalog and telephone merchants even if the Internet had never existed. But $7 billion of the loss is what Fox calls "new e-commerce loss" -- money that would otherwise have been spent at local, tax-paying stores but instead was directed to Web-based businesses.
That $7 billion wouldn't solve states' budget crises; California alone faces a deficit of more than $20 billion this year, according to a state government report. But additional tax revenue would certainly help cash-strapped states making difficult budget decisions.
At the heart of businesses' complaints: Every state, county and city in the nation has its own definitions of what's taxable, and by how much. In California, for instance, sodas are taxable but juices are not. In Washington state, a juice drink is exempt from sales tax if it's 100 percent juice, whereas in New York, that bar is set at 70 percent. Some parishes in Louisiana tax food, others exempt it, and others charge a reduced rate.
Bill Curry, spokesman for Amazon.com, the nation's largest online-only retailer, says the 7,600 different taxing jurisdictions in the United States make this issue all the more complicated for e-merchants as well as consumers.
Case in point: James Rohan, an executive search consultant in New York City, bought two American flags from Wal-Mart's online store. Flags are tax-free in the state of New York, but Wal-Mart charged Rohan the full sales tax on one flag, and partial sales tax on the other. "They said, 'We know of no such [tax] exemption in New York State,' and that was it," says Rohan, who complained to the New York state attorney general's office. Cynthia Lin, a walmart.com spokesperson, told Consumer Reports WebWatch the company refunded Rohan's money -- $1.98 for one flag, $0.42 for the second -- after discovering the error themselves.
Bob McIntyre, director of the Citizens for Tax Justice, says computer tax-preparation programs should be able to help businesses comply with sales tax laws. But businesses say -- and Congress has agreed -- that until the states get their acts together and simplify their tax laws, the system is just too complex to cope with.
"It imposes an unfair duty upon corporations to try to track the policies in each locale … the current system is Kafkaesque," says Patrick Byrne, the CEO of Overstock.com, a major national online discount retailer.
Even officials agree; the taxing system is such a mess that simplification must be a priority, according to the National Governors Association. "The inequities in the process are so strong, we are compelled as a country to fix them," Utah Gov. Michael Leavitt said in a statement.
The Impossible Tax
Enter the use tax. States currently can't order out-of-state businesses to pay state taxes, but they can still make rules for their citizens. So the rule in most states, unenforced for decades, has been this: if you don't pay sales tax on an item bought from an out-of-state business, you owe use tax to your state (usually in the exact amount of the lost sales tax).
With billions in tax revenue up for grabs, you'd think states would make it easy for consumers to pay their use taxes. Wrong. The system is far from standardized and assumes you understand states' Byzantine sales tax regulations --perhaps explaining why use tax compliance is around 2-3 percent, according to David Brunori, a professor of tax law at George Washington University.
Dan Gartin, a technology consultant and online shopper in Omaha, Neb., says avoiding Nebraska's 5.5 percent sales tax is one of the reasons he turns to the Web to shop. He hadn't heard of Nebraska's use tax, which requires that he tally up his out-of-state purchases and send a check to the state treasury.
"I had no idea that such a ludicrous tax requirement existed," he says. "I can't imagine ever filling out the bizarre paperwork."
Fox estimates the state of North Carolina, for example, lost $155.4 million in state and local sales taxes because of online shopping. That's almost exactly equal to the $120-140 million in estimated use tax owed to the state, according to Andy Sabol, director at the North Carolina department of revenue.
"If it's [tax] on a $100 order, the tax is going to be six or seven dollars. Collecting, sending, billing and processing for seven dollars is not efficient," says Harley Duncan, executive director of the Federation of Tax Administrators.
Businesses don't show much willingness to help collect use tax -- or even to inform consumers about it. At Amazon.com, consumers pay sales tax to Washington and North Dakota, states where the e-tailer has physical offices and warehouses. Nowhere on Amazon's site does it mention that shoppers owe use tax in 43 other states. "We sell a lot of books that give tax advice, but we don't give it ourselves," says Curry.
A Simpler Solution?
An end to the pointless use tax regime may be at hand. On November 12, officials from 32 states agreed on a plan to harmonize sales tax definitions. Ultimately, this could lead to a much simpler and fairer online sales tax system: consumers would just pay their usual state and city sales tax, no matter where they shopped.
A harmonized online sales tax would make Internet shopping a bit more expensive, but that doesn't faze many Internet shoppers. Laura Palmer, a New Yorker who shops online about once a month, says online shopping for her is about convenience, not about avoiding taxes. "It's really a matter of being able to get something without walking all over town," she says.
Other consumers seem to agree. Ken Cassar, an analyst at Jupiter Research, says in three years of consumer surveys, avoiding sales tax has consistently come up as less important to online shoppers than price and ease of use. In a March 2002 Jupiter survey, only 13 percent of shoppers said they'd abandoned an online purchase of more than $250 to go find a store that didn't charge sales tax.
The tax plan has to pass state legislatures and Congress for interstate sales-tax collection to become mandatory. Until then, millions of consumers are keeping a secret from the tax man.
Who Owes What To Whom?
Confusing rules surrounding sales tax on the Internet make it difficult for consumers to figure out if they've been under- or over-charged.
If a company has a business presence in your state, such as a store, warehouse or call center, you should pay the same sales tax you would on items from a store down the street. The sales tax in your city or town applies.
Online businesses are usually very good at knowing which states they owe taxes to, experts say. So don't worry about that. What you do need to worry about is local taxes and offbeat exemptions. Nobody's studied the compliance of online retailers with local taxes and tax holidays, but anecdotal research has showed some troubling trends.
For instance, many cities and counties in New York don't charge sales tax on purchases of clothing under $110. So when a Staten Island, New York woman ordered clothing from jcpenney.com, she was wrongly charged 8.25 percent in New York state and local sales tax, according to the New York state attorney general's office, which handled the complaint.
Fixing the problem can be frustrating, because of the same jurisdictional issues that make the taxes so confusing in the first place. You can strengthen your stance by calling your state's attorney general's office or tax department (which may have a name like the Department of Revenue or Board of Equalization) and getting the name and number of a sales tax expert. Double-check the tax you do or don't owe, and give the expert's name and number to the retailer. Or call the Better Business Bureau (BBB) in the state where the retailer is based and inform the BBB of the problem.
As always, persistence pays off.
|
Sascha Segan is a freelance writer whose work appears regularly in Smart Computing, PC Magazine and Knowledge@Wharton. Previously, he wrote about technology for Expedia Travels Magazine and ABCNEWS.com. He wrote the book Frommer's Fly Safe, Fly Smart.
In September 2002, he wrote about Sony's $10 million advertorial campaign for Consumer Reports WebWatch
|
