It probably surprises no one that since online commerce has increased significantly over the last few years, the government now wants it’s share. Recently, there have been a couple of great articles over at CNET News.com on what’s going on with the latest tax laws.
Basically, there are two issues here:
1) Should online purchases delivered digitally (downloads of music, movies, e-books) be taxed?
2) Should online purchases delivered physically (ie mailed to you) be taxed?
The i-Tunes Tax: Online Purchases Delivered Digitally
According to a recent CNET News.com report, 15 states and the District of Columbia now tax downloads of music, movies and electronic books.
These states typically say taxing digital-media downloads is a matter of treating physical shopping and online purchases the same. Buying a CD at Tower Records is taxed, the argument goes, so why should a stream of bits from iTunes or Walmart.com be tax-free?
With the sales of digital music soaring – from $400 million in 2004 to $1.1 billion in 2005 – it’s not surprising that state governments are starting to take notice.
Arguing against taxation of digital content is the National Taxpayers Union, who say that we already are taxed for online purchases in a number of ways: consumers pay telecommunications taxes for internet connections and sales tax for mp3 players, companies that offer the digital content pay property taxes, their stockholders pay divident or capital gain taxes, their employees are paying income taxes.
Nexus and Online Purchases Delivered Physically
Online purchases delivered physically to your location are another tax topic. The US Commerce Department reports that business to consumer e-commerce sales were $86.3 billion in 2005, up 58% from 2004. At an average tax rate of about 6.5%, that would amount to about $3.6 billion.
Right now, however, there’s a legal concept called ‘nexus’ which means state governments can only tax companies who do business in their state. That’s why if you buy something from Amazon.com and you live in a state where they don’t have offices, they don’t collect sales tax on your purchase.
In a 1992 case called Quill v. North Dakota, the U.S. Supreme Court affirmed the requirement of nexus, saying only Congress had the power to change those rules.
That decision has given rise to two classes of online sellers. Apple and Wal-Mart, in one class, have physical stores all over the country and could be required to collect sales taxes if each state mandated it. But companies without as many storefronts or offices, like Yahoo and eMusic.com, would be immune.
That’s not stopping the government from trying to collect. According to this CNet News.com article,
Online purchases from sites like Amazon.com and eBay may seem to arrive in a state of untaxed bliss. But the law actually requires shoppers to pay their own state’s sales tax rate–the concept is called a “use tax”–and voluntarily cough up the exact amount owed each year at tax time.
Tax bureaucrats for years have lamented the difficulty of collecting use taxes on catalog and mail order sales. Now, with online shopping growing rapidly and nearing $100 billion a year in consumer sales, tax collectors are adopting more aggressive tactics.
I can only imagine this will get more complicated in the future.
Latest Comments