By Eva Rosenberg, MarketWatch
Back in 1998, Congress promised not to tax the Internet, when it passed the Internet Tax Freedom Act. Well, that promise is about to be broken by the Marketplace Fairness Act. Sort of.
It’s not the Internet itself, or access to the Internet, that’s about to be universally taxed. It’s online purchases.
The Senate voted Monday to approve the bill. If it becomes law, most of the places where you shop online will start charging sales taxes in your state – even if the store is located elsewhere. The taxes collected by the retailers will be sent to your state to fund projects and schools – and perhaps to balance your state’s budget.
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Opinion: Congress’s online sell-outs
Assistant editorial page editor James Freeman on whether Congress will vote to impose an online sales tax. Photo: Getty Images
Will the legislation have shoppers scrambling to make last-minute Internet purchases? Probably. And will they end up running to adjacent states with lower sales tax rates? For big-ticket items, like cars, boats, and wall-size TV screens, they just might. This is an old tradition. I remember years ago hearing people in Los Angeles brag about buying their cars in places like Montana, where there are no sales taxes.
The brick-and-mortar economy of adjacent states might improve as a result of such maneuvers. But will buying from lower-tax states do you any good?
Not necessarily. Twenty-nine out of 50 states have “use tax” laws. That means, when you buy something online or in another state, you still have to pay the equivalent of the sales tax you would have paid if you had bought that item in your state.
It’s not just businesses that are responsible for use taxes. Many states have a line for use tax on the personal income tax form. You’re on your honor to tell the state how much money you spent on purchases without paying sales taxes. Of course, since you’re not sitting around tracking those numbers, the states are kind enough to provide a chart for you to use, based on your earnings.
That’s not as bad as you might think, though. For instance, in California if your adjusted gross income is between $100,000 and $149,999, your use tax obligation is only $88 – plus the use taxes on really large purchases, like vehicles of any kind.
With vehicles, you have to register with your state’s Department of Motor Vehicles and pay the fees there. When you do, they will insist on seeing proof of sales taxes paid – or collect the use tax.
You have a line for this on your tax return and you’ve been ignoring it? Will you get audited over this? Nope. An individual’s routine use tax amounts are too low to cause an audit. But if you are ever audited, you will be assessed the tax if you’re in the habit of shopping online.
How does this affect Internet sellers?
AFP/Getty Images
Jeff Bezos, CEO of Amazon.
One of the major Internet marketing organizations that has been actively fighting against legislation within individual states is the Performance Marketing Association. (Full disclosure: I am a member of PMA.) Members include both small and large online retailers and service providers. As more and more states have passed legislation that defines a local presence as having an affiliate in the state, members have cut their affiliates in those states.
What’s an affiliate? The easiest way to illustrate this is to use Amazon.com
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as an example. Nearly every website or blog that makes note of a favorite book or film or product also features a prominent link to Amazon.com, where readers can buy that product. Because the website owner get a commission when someone clicks that link to Amazon.com and shops there, he is an affiliate. He may have links to a variety of other sellers, like his favorite clothing purveyor, or his favorite sports outfitter, or a discount travel site, or whatever. He’s not selling anything. But he gets commissions when readers click on his links.
The states regard him as an agent of each of those sellers. That means the seller has a presence in his state and must collect sales taxes there. That’s called nexus. That’s what forced Amazon.com to settle with the State of California and agree to start collecting sales taxes there – even though it doesn’t have a shop or factory in the state.
Faced with complex collection, reporting and administrative tangles, the online vendors simply removed their presence in the states taxing them by requiring affiliates in those states to remove all links from their websites.
Some affiliates are such good bloggers and writers that they have been earning a lucrative living purely from affiliate commissions. In fact, some have become millionaires, without ever having to sell a single thing. They are called super affiliates. Normally, vendors chase after them and offer them higher commissions, knowing the super affiliate will dramatically increase the vendor’s sales. When the super affiliates were suddenly being cut off from their income sources, many actually moved to states that were not contemplating nexus sales taxes. The result was those states lost both the sales taxes and substantial income taxes.
Reporting compliance for the small business
You might be an Internet marketer and not even realize it. Millions of people sell things on eBay
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every day. When the 1099-K form came into use this year, people wrote to TaxMama in shock that their eBay sales were being reported to the IRS. They just thought of themselves as dabbling in sales, not as really selling – even though it takes more than 200 transactions and $20,000 worth of sales to generate one of those 1099-K forms.
Can you imagine how complicated it would be for you, as a home-based entrepreneur, to track sales taxes in 50 states? And to file sales tax returns in all those states? And if you have to file sales tax returns, are you now also subject to business taxes in those states? Talk about major headaches. Who would have time to run a business with all the compliance involved?
That’s the nice thing about this Marketplace Fairness Act. Your business is not responsible for collecting sales taxes in other states as long your “remote sales” revenues are $1 million or less.
Business that do sell that much out of state will have access to software tools that are meant to be easy to use. States are required to provide a simplified registration process. And more great news: You won’t be subjected to income taxes or franchise taxes in those remote states. The law does away with the affiliate nexus issue.
Perhaps that’s why there is bipartisan support for the bill.
Eva Rosenberg is the publisher of TaxMama.com, where your tax questions are answered for free. She is the author of several books and ebooks, including Small Business Taxes Made Easy. And she teaches tax courses at IRSExams.com and CPELink.
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