Taxes on the Internet

There is an interesting article on the WSJ site today touching on the topic of whether or not online gambling winnings are taxable (the answer appears to be yes - go figure...), as well as the rules for deducting your losses (MUCH more vague). If you want to read more, you can check out the article here (subscription may be required).

This leads to my question - another online tax question - when do you have to pay sales tax on the Internet?

Why is this important? If you can get free shipping on an item - and avoid paying sales tax on the item - it can be a significant savings to you. For example, if you were to find a site offering free shipping on a $500 item, you could save $35 if your state had a 7% sales tax.

According to the NOLO site,

If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

It is also noteworthy that some states do not have sales taxes (Alaska, Delaware, Montana, New Hampshire, and Oregon), so they do not suffer any losses through these rules.

So unless the retailer has a physical presence in your state, you are not required to pay the sales tax on that purchase. If you do live in that state, you'll be asked to pay the additional amount to cover the sales tax (this is why you'll see a tagline that reads something like "residents of VT, please add 7% sales tax to total). However, it should also be noted that, theoretically, you are liable for the tax even if they do not ask for it if they actually do have a physical presence in the state. No word on if or how this is enforced, but you can no longer argue that you didn't know about it!

Still, there are ways to save money by purchasing goods online, especially if you can get cheap (or free!) shipping. Just another way that Everyman can save a bit of money!