Study: Online Sales Tax – Who Cares?

Although some e-tailers argue that imposing a sales tax on Internet purchases would cause online sales to plummet, a study released Tuesday by Jupiter Media Metrix concluded that most consumers are indifferent to the presence of an online sales tax.

Jupiter’s survey of consumers who had abandoned a shopping cart found that 74 percent do not consider sales tax an issue for smaller purchases — although the survey did find that 21 percent of consumers had abandoned one e-tailer in favor of another to avoid paying sales tax on purchases under US$50.

Charles Collins, director of the Sales and Use Tax Division of the North Carolina Department of Revenue, told the E-Commerce Times that the Jupiter study backed up “other statistics” indicating that taxing e-commerce will not affect online sales.

“Most consumers buy online for convenience,” Collins said.

The True Story

Although many consumers and e-tailers believe that online purchases are exempt from all taxation, that is not actually the case.

At present, remote sellers are only required to collect sales tax if they have a physical presence in the purchaser’s state — thereby exempting Internet pure plays from tax collection duties in most states.

Bolstering Jupiter’s claim that sales tax does not matter to most consumers, six of the top 10 most visited retail Web sites in March — including BarnesandNoble.com, Apple.com and HP.com — were multichannel retailers that are already required to collect tax in certain markets.

Brick vs. Click

“Many brick-and-mortar retail companies launched separate online businesses in order to compete with nimble Internet-only retailers sheltered under the Internet Tax Freedom Act,” Jupiter analyst Heather Dougherty said. “But times have changed. The Tax Freedom Act, which intended to protect nascent Internet companies and stimulate e-commerce, is set to expire.”

Dougherty added: “The threat of Internet-only retailers now is miniscule; and state and local governments are feeling the sting of lost tax dollars.”

According to Dougherty, if the end of the tax-free Internet is approaching, retailers would be well advised to merge their online and offline tax-calculation and tax-collection capabilities, as well as integrate their Web and in-store functions, in order to streamline customer service and business operations.

Under existing laws, state and local governments risk losing up to $7.7 billion in tax revenues, or 7 percent of total sales tax revenue, from online sales in 2005, according to Jupiter.

Changes Coming

While Internet pure plays are exempt from taxes in states where they do not have a physical presence under current law, Collins said that could soon change.

He said that several bills have been introduced into the U.S. Senate’s Commerce Committee that would allow states to require out-of-state e-tailers to collect and pay sales tax.

Collins said that if such a bill passed, it would most likely include a list of requirements — designed to make the tax collection and reporting process easier — that states would have to meet before they were allowed to tax out-of-state e-tailers.

One Way

Some of these requirements are included in the Streamlined Sales Tax Proposal (SSTP), a plan designed to simplify the sales tax process for both online and offline businesses.

Provisions of the SSTP include requiring states to limit the frequency of tax rate changes, as well as the use of one tax form for all participating states.

Collins, who is the co-chair for the SSTP steering committee, said that five U.S. states, namely Wyoming, Kentucky, Utah, Arkansas and North Dakota, have already passed sales tax legislation based on the proposal. Collins also said that similar legislation is pending in an additional 20 states.

6 Comments

  • I have read the responses posted to this article and cannot resist responding to the misinformation/ignorance that I AM reading. Please allow me to educate the general public about sales taxes. 1. Sales taxes are not administered by the IRS. Sales taxes are levied by state and local governments. The constitution allows the states the right to collect public funds in appropriate ways, as long as they do not discriminate against anyone and do not prevent interstate commerce. 2. In spite of many mismanaged budgets, the government does have legitimate expenses that must be funded: education, public health and safety, transportation, etc. If you do not like the way the money is being spent, then get out there and vote and become involved. This is America and we have the right to say how the money should be spent. 3. Anybody who thinks they do not owe tax on their online purchases is mistaken. If a vendor does not provide you the service of collecting and paying the tax for you, you are legally obligated to self-assess and remit the tax directly to the state. Many states include this in their personal income tax returns. While most states do not/cannot enforce this, it does not change your obligation. 4. Many companies have been relying upon little guidance from the Supreme Court, and Congress has not stepped up to aid them in this issue. The prevailing "wisdom" in the past was not to collect taxes. Now there are going to be changes due to the poor economy and changing political climate. I for one welcome a clear definition of who should collect taxes when, a simplified and more fair system, and hopefully a more educated public. It will be better for business and better for society.

    • I agree — shopping without paying taxes is one of few true benefits of shopping online. If the situation changes and sales taxes start being collected on every Internet sale, then attitudes are sure to change…

      • Roni is right — the sales tax and shipping tend to cancel each other out in many people’s minds. If given a choice between paying just sales tax or paying both sales tax and shipping, most shoppers will just go back to brick-and-mortar.

        And a question: Do you think this is different from a company charging a subscription fee or auction listing fee in consumers’ minds, or will they view it in the same way? If they do, there’s a chance for a drastic decrease.

  • This is my opinion on this matter of sales tax

    over the internet. This system or the people

    that are running the IRS are a bunch of criminals;

    there is no statute in our constitution that makes this a legal binding. All these people want is money so they can give it to other countries and welfare. No one knows how to stand up against the system. That’s why our U.S. government got you buffaloed into thinking you have to pay tax for this and that and so on. [wake up America]

  • we are being taxed to death. all so the government can have more money to spend. i think

    the government is on welfare and i think everyone should get off the dole, including congress/senate and our state governors. where is this money going? to provide government jobs for government lackeys who do nothing but decide on how to spend our money. this is worse than the UK, where they support a queen who has no clothes mentality.

  • I want to point out that the Jupiter study did not take into account the fickle nature of the public. Of course, a low percentage of the people asked stated that tax is not a concern. That is because (for the most part) they are not paying taxes now. IF a tax went into effect, there would be a dramatic decrease in ordering. Yes, online purchasing is easier, but there is already an added cost for shipping and returns are a hastle. One of the few true benefits is that fact that taxes are not applicable. Just remember, that not too many people were upset about the increases in gasoline costs either, until it got drastically out of hand. The same public outcry and ripple effect will happen if taxes are charged online.

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