Shopping Online? Double Check If You’ll Owe the IRS

November 20, 2017 : Mike Slack

Within the last decade, online shopping has become as much of an everyday activity as visiting a physical brick and mortar store. Online shopping is estimated to account for 10.1% of all retail sales in 2017. That’s up nearly one-and-a-half percent since 2016.

Despite the rising figures, online retail is still relatively new. Both retailers and state governments struggle to address when a sale should be subject to sales tax. Let’s explore some of the reasons why.

 

Supreme Court Influence

The story behind this ongoing struggle dates back to the 1992 US Supreme Court decision in Quill Corp. v. North Dakota, where it was held that an out-of-state company had to have a nexus or physical presence in a state before requiring the collection of sales tax by the state it exists within.

The Quill case centered around a mail-order company who experienced a parallel issue prior to the boom of online shopping. Various Courts have since ruled the case’s physical presence requirement applies equally to sales the take place via the internet.

 

Tax-Free Online Shopping Myth

Many argue that the state-presence requirement creates a potential loophole. Specifically, one could theoretically only shop online at retailers who have no connection to their home state, and avoid paying sales tax altogether.

Not so fast! Forty-five states, plus the District of Columbia, impose what is called a use tax to make up for lost sales tax revenues on out-of-state purchasers. The states of Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a use tax. These taxes are generally assessed at the same rate as a sales tax and are imposed on out-of-state purchases that will be used, or consumed, within the state.

Most states make the presumption the state where an item will be used is the state where it is shipped to by the retailer.

 

Tracking Customer Spending

Use taxes are not paid at the time of sale and are typically added in addition to the individual’s annual income tax. Keeping track of every dollar spent online is incredibly difficult, so many states allow the use of an amount calculated based on your income to determine the applicable amount to pay if actual expenditures are not known.

If you are unsure of the use tax or annual income tax guidelines of your state, contact your neighborhood H&R Block office for more details.

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Mike Slack

Mike Slack

The Tax Institute, H&R Block

Mike Slack, JD, EA, is a senior tax research analyst at The Tax Institute. Mike leads research teams focused on business and investment tax issues.