THE INTERNET TAX, THE GOOD, BAD AND UGLEY

Part I

 

There is a lot of discussions concerning the “Internet Tax” as passed by the US Senate.  Unfortunately, much of the conversation about the tax is not completely accurate.  I am not necessary taking a position on the “Internet Tax”, but we need to have a correct idea as to what the issues are.  Thus I over the next several weeks, as part of my blog, I am going to have weekly updates about the tax.  I will explain what the tax is all ablaut and how it could affect all Taxpayers. 

Most people are aware of sales tax which is dictated by each state’s “Sales Tax” law; there are 50 states, thus 50 different laws, many are not in conformity.  In California, sales tax is only charged on the sales of merchandise; however New York also charges tax on services.  Some states charge tax on the delivery of merchandise, but other states do not.  Creating and mailing invoices by a billing company is not taxable in California but it is in New York. There are some states that do not have a sales tax.  Currently, sales tax is imposed only on where the product is sold and if the seller has a business presence in the same state.  If the purchase occurs over the internet and the seller does not have a business presence in the state the purchase occurred, then sales tax is not charged.

Most people on the other hand are not aware that states that have a “Sales Tax” also have a “Use Tax”.  “Use Tax” requires the purchaser to pay a tax for using the product in the state when tax is not charged.  Consequently if sales tax is collected no use tax is required, if no sales tax is collected, then use tax is required.  States that have a sales tax requires the individual to report purchases where no sales tax is paid and remit use tax on those purchases.  Many times this is done on the individual’s state’s income tax return.  On the California personal income tax return (from 540) this is reported on line 95 of page 2, for New York, it is line 59, page 3.  However most people do not understand this and thus it is ignored.  Even many professional tax preparers are not aware and do not understand “Sales and Use Tax” laws.

Even though the above is a brief explanation of the “Sales and Use Tax” laws, as you might gather it can be difficult to totally understand and to administer.  The sad truth is “brick and mortar” business are losing sales to large internet sales companies like Amazon who do not collect sales tax, thus the purchaser can buy product at a perceived discount.  It is not uncommon for a person to go into a “brick and mortar” business try on clothes or look at products they wish to purchase, then go home and buy clothes or products over the internet.  This has resulted in many “brick and mortar” business to go out of business.  Many Borders book stores have closed their doors.  This is especially hard on small business. The states also lose a lot of tax revenue this way.   The “Internet Tax” is an attempt to correct this.  However is it a good, bad or just ugly like many of our tax laws are.

 

My future Blog posts will closely look at the proposed law and the changes that are proposed as it goes through the sausage mill in congress.