Buying Online To Avoid Sales Tax, And Not Paying Use Tax? Congress May End That Soon

Most of us at one time or another have probably been in a situation where we were shopping for something, possibly a big ticket item, and after shopping around we found that we could buy the item online, and not have to pay the sales tax.  For example, if you were looking at buying a $1000 TV at your local Best Buy store where they collect 6.5% sales tax, you would expect to pay another $65 or so in sales taxes.  Buy it at and you could have it delivered with no sales taxes charged (as long as Amazon doesn’t have a presence in your state).

The thing is, you’re not really supposed to avoid paying taxes on the items you buy online as each of the states that currently have a sales tax imposes a “use tax” on items purchased out of state and brought back home.  So if you buy that $1000 TV on Amazon, you’re supposed to be paying a $65 use tax on that item when you file your taxes.

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Use Taxes Aren’t Usually Paid

The problem is that most of the time people don’t bother to pay a use tax or report purchases that they’ve made online or in other states.  From

Make no mistake: Most Americans are skirting this tax. Each of the 45 states with a sales tax imposes an equal “use tax” on items bought out of state and brought back home, so as to protect their own merchants. But most taxpayers don’t pay, because the retailer isn’t required to collect it.

Without a way to collect, states figure they are losing more than $20 billion a year, according to estimates by Streamlined Sales Tax, a Nashville-based advocacy group.

Basically most people aren’t paying the use tax because they’re either ignorant that it actually exists, or they are purposefully skirting paying the tax.   I’ll admit that up until I started reading personal finance blogs a few years ago I didn’t realize that it existed myself.

Because the use taxes aren’t being paid states are estimating losses of up to $20 billion a year in tax revenue (although that figure is up for debate, some states who have enacted internet sales taxes have shown less taxes collected).  That’s too much money for them to ignore.

Use Tax and Online Sales Tax Collection


Federal Law Coming Soon To Allow Collection Of Sales Taxes?

For a while now some governors have resisted making changes to existing laws to require businesses to collect sales taxes on online sales.  Now, however, many states are cash strapped and looking for ways to increase revenue.  Requiring businesses to collect the sales tax would be one way to do that.

Hungry for a share of the lost dollars, some governors have dropped opposition to a federal law allowing collections, and now bills with broad bipartisan support are pending in both houses of Congress. Because they don’t cost Uncle Sam much revenue, experts say the bills could move quickly.

“The sponsors hope a bill will pass this year,” says Scott Peterson, director of Streamlined Sales Tax. He says almost two dozen states could have collections up and running within 90 days of a federal law change, while it might take others six months or longer.

So we’ve now got bills with a decent amount of support pending in both houses of Congress.

Would All Businesses Be Required To Collect Sales Tax?

One point of contention on any new law that might pass will most likely be what businesses would be required to collect sales tax on online purchases.  Most are saying that there would be a threshold of sales in a state before they are required to collect sales tax.  Because of that many smaller businesses would be excluded from having to collect.

Still, issues remain. The biggest: what the threshold for requiring sales-tax collection will be. The Senate versions of the bill draw the line at $500,000, while the leading House bill says $1 million—a gap likely to cause wrangling.

Whatever the threshold, it is likely to exclude thousands of smaller retailers active on platforms such as Amazon, eBay, and Etsy whose customers are ignoring current law.

Even if smaller businesses wouldn’t be required to collect, some states are trying to make it mandatory for some smaller retailers to inform customers that they will owe use tax on their purchase, or face fines.  While one law in Colorado to that effect has now been vacated, others are looking to try similar measures.

Those against the idea of an internet sales tax say that the cost would kill small business, and that it would be cost prohibitive for small businesses to keep up with the more than 9,600 state and local sales tax jurisdictions in the U.S., even with the software we have today.   The local and state sales taxes are constantly changing, and to keep up with them would be a new compliance cost, one that larger businesses could keep up with, but one that smaller businesses might not.  This is part of the reason why larger businesses are OK with the idea, less competition for them.

Online Sales Tax May Be Coming Soon

So if you were planning on buying a big ticket item online soon to save on sales tax, you should be aware of a couple of things. First, you’re already supposed to be paying a use tax. Second, larger e-tailers like may be required to start collecting sales tax soon if a law gets passed by Congress – and most states have said they could have things up and running within 3-6 months.

What do you think about requiring businesses to collect state sales tax for online sales?  Did you even know that use tax existed?

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Last Edited: 24th July 2012

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  1. says

    I’ve been surprised that this loophole has been allowed to exist as long as it has. Closing the loophole wouldn’t be a tax increase but it would raise revenue, so you’d think they would have done it by now.

    • says

      I wonder if they’ve avoided making changes this long as even though it isn’t a tax increase, it will still feel like one to a lot of people? By most accounts, most people don’t pay use tax in their state, so any state tax being collected by Amazon or other e-tailers will be a defacto increase – without actually being one?

  2. Wendell (aka Rocking Chair Wisdom) says

    For your local establishment it is not difficult to collect the sales tax. You know what the tax rate is and it is automatically calculated for you at check out. In this case, as a business owner, you only need to worry about your individual state sales tax and maybe your locality sales tax. You report your sales to the state or municipality and remit the sales tax collected. Pretty straightforward.

    The sales tax is based upon where the sale takes place. If you are visiting live in Florida and are visiting California and purchase something in California, you pay California sales tax.

    Try buying an automobile in one of the sales tax free states listed above and register it in your home state. I suspect you will end up paying a use tax to your home state.

    If you buy the auto in Oregon for instance, your home state will collect the tax at time of registration. Buy a piece of equipment for the same price in Oregon and take it home, it is your responsibility to self report the purchase and pay the tax.

    With business such as Amazon, they will need to program their computers for all state sales taxes along with all local municipality sales taxes. In addition, they will need to be able to monitor all of them for changes.

    Another issue for businesses such as Amazon is where does the sale occur? Is it the billing address on my payment card, or is it the billing address? Or could it be the location of my ISP?.

    What happens when the Feds come in? Will it be a national sales tax and the Feds get to keep the revenue? What happens at the state level? Will the states now lose internet sales tax they were collecting?

    • says

      I think this is one of the big problems with an Internet sales tax. The complexity of trying to collect sales taxes for the 9600+ local and state governments. It’s going to be a huge compliance cost for small business, even with software.

    • says

      This doesn’t strike me as much of a compliance burden at all, even for small businesses. A public database could EASILY be created with all of this information. It would be maintained by the government (at quite a low cost, mind you) and municipalities could be responsible for keeping the information updated. You could then just plug in an address and see the rules that apply. It would be almost trivial to implement this on even smaller platforms. There would undoubtedly be a WordPress plugin within a few weeks of this going live, so even small individual ecommerce sites wouldn’t have an excuse. As for where the sale would take place, pick one. The most logical to use would be the shipping address, but it doesn’t really matter. Anything at all would be an improvement over the current system.

  3. says

    A sales tax isn’t so bad if you don’t buy a lot of stuff. I am happy to live in a state without an income tax. In Florida, we also exempt services and food from sales tax which makes it easier to accept.

  4. Noah says

    CA has been trying to collect sales tax from for the longest time but it looks like Amazon has a powerful lobby and always seems to wiggle out. I will admit I have been putting $0 as my use tax for years although I probably don’t buy more than $1K worth of merchandise online. I believe there will always be ways of skirting an online tax and plan to do so for as long as I can.

    If the Feds were smart they would start small with 1% as most people are more likely to agree to it vs a 7-10% tax. No matter what happens, I will continue to buy online because of the time saved and deals.

  5. says

    I don’t think it would change my purchasing decisions much. Especially since sales tax is only 6% here in PA. The convenience of online shopping and the fact that some products aren’t even available locally would be enough to keep my online purchases happening.

  6. says

    I’ve definitely skirted this from time to time; once, I even bought something and had it shipped to my parents’ house out of state in order to avoid taxes. IT was cheaper for my parents to pay to ship it to me than it would have been for me to pay state sales tax (I did reimburse my parents, naturally).

  7. Nick says

    Retail as we know it will change dramatically if online retailers are required to collect sales tax. It would “level the playing field” in a way, but could cripple some companies who need that advantage to survive.

  8. Tate says

    First of all the states aren’t ‘losing’ anything. It is troubling to me how many people are perfectly willing to let our government (state or fed) start taking our money. I’m sure Noah is a nice guy, but he has suggested that our respective governments start taking money a little at a time then raise as they see fit…as opposed to what, trying to start off with their true intentions?

    While I can stomach this a little better since most states operate much, much more efficiently than the feds, my state of Arkansas has been in good shape financially, it bothers me that they see revenue that they feel like they’re ‘losing’ so what do they do TAX IT. I say to heck with that, do with what you have and stretch every last penny. We all know that taxes (especially ones like this) don’t disappear.

    And you can bet, once the states get involved the Federal Government won’t be far behind (VAT tax anyone?)

    • Noah says

      I never recommended it as a solution but if I was the greedy government it is what I would do. The easiest way is to start small and ease into it. However, I hate the idea of more taxes and will avoid having to pay them on online purchases as long as I can.

      The good news (for me) is that in our country there are plenty of anti-tax advocates like yourself that will fight the good fight so that I don’t have to pay much attention to this topic. I have much more enjoyable things to do with my time and energy.

      By the way, I am a nice guy :)

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