Tax-Free Shopping Days on the Internet May Be Numbered

Many consumers flock online to buy items they are interested in. In fact the total amount of online sales for 2008 is expected to make up about eight percent of the total consumer purchases made for the year to the tune of $204 billion. This is up from $175 billion in 2007 (source: tech.yahoo.com). Consumers will buy online to avoid many things. Lines, crowds and in some circumstances taxes can be avoided with a visit to cyberspace. But with the recession looming and the government scrambling to fill the tax gaps, the days of tax-free shopping on the internet may soon be coming to a close.

Using the 2008 figure from above it is estimated that the web can produce an additional $3 billion dollars for state and federal governments. While the added taxes would certainly help out, it would merely be putting a Band-Aid on a gaping wound that requires stitches. The Center on Budget and Policy Priorities estimates that the states' budget gaps in the current fiscal year will total $89 billion (source: tech.yahoo.com). Still the government is pressing the issue.

The problem lies with the fact that it is not nearly as easy as it sounds to have online retailers collect sales tax from consumers. An online business that has sales nationally would have to deal with thousands of tax-collecting jurisdictions on the state, county and even city level. There are also different rules when it comes to the classification of a product for tax purposes. For example, one retailer may classify a sleeping bag as bedding while another may classify it as sporting goods and thus change the tax implications (source: tech.yahoo.com).

The current rule for selling online requires a business to collect taxes on any out of state sales in states which they have a "physical presence." This gets tricky if the business is online only as they will have no brick-and-mortar store front and thus no real physical presence. Even with this rule, items are not supposed to be tax-free. It is up to the consumer to report such items in what is known as a "use tax." But, not surprisingly, these items are often not reported (source: tech.yahoo.com). So what is the solution?

In the hopes of bringing more clarification to the rules and to get a chance to bring in taxes from online retailers, 22 states and numerous brick-and-mortar companies have shown their support for an organization called the Streamlined Sales Tax Governing Board. The group is dedicated to getting states to simplify their tax laws and make rules more uniform so as to make tax-collecting online easier. To date more than 1100 retailers have registered with the streamlining group and are collecting sales taxes on items shipped to states that are part of the agreement and more states are planning on joining this year (source:tech.yahoo.com).

Soon there will be no place to hide from taxes, not even in cyberspace. It seems the days of tax-free purchasing on the internet are indeed coming to an end.