Online Sales Tax Is Coming

Are you looking to dodge state sales tax on an online purchase? Better place the order now.

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.

Earlier this week The Wall Street Journal reported a change in the politics surrounding this issue. (See “Tax Break Nears End for Online Shoppers,” July 16.) 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.

Here is an example of how the law works now: Say a homeowner in rural Wisconsin orders a $200 patio chair from an “e-tailer” in New Mexico that doesn’t have a store in Wisconsin, which levies a 5% sales tax. The buyer doesn’t owe sales tax in New Mexico, and technically he doesn’t owe $10 of sales tax to Wisconsin. But he does owe $10 of use tax to Wisconsin. The sponsors of the bill want the states to get that $10.

If the law changes, it will end a controversy bedeviling federal courts since the 1930s. In the last major go-round—Quill Corp. v. North Dakota in 1992—the Supreme Court refused to impose collections on out-of-state customers, citing a 1967 decision relying on due-process and interstate-commerce arguments. But the Quill decision also reminded Congress it had the power to change the law, and now it might do so.

Meanwhile, states have resorted to various measures to claw back tax. In the 1980s, the New York revenue officers raided a high-end jewelry store that was enabling customers with out-of-state addresses to avoid state sales tax on big-ticket items.

About two dozen states now pointedly ask taxpayers to estimate and pay use taxes on state income-tax returns, with some suggesting a figure based on the resident’s overall income. But a 2012 study by Minnesota found this doesn’t work well: For tax year 2009, most taxpayers didn’t admit to owing use taxes. In Alabama, the average use tax reported per return that paid it was $12.

Stung by what they see as unfair competition, bricks-and-mortar retailers are supporting efforts to change the law. “Online and mail-order retailers should collect sales tax at the point of purchase, too, so there will be a level playing field,” says Jason Brewer, a spokesman for the Retail Industry Leaders Association, which includes nine of the 10 largest merchants.

Even giant e-tailer Amazon, AMZN +7.87% the target of legislation on sales-tax collection in more than half a dozen states, supports a change in federal law. A company spokesman says it collects sales tax in “more than half” the areas where it does business world-wide.

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, EBAY +3.25% and Etsy whose customers are ignoring current law.

States already are trying to get tough with some of these. In 2010 Colorado passed a law requiring out-of-state sellers with more than $100,000 of sales to Colorado residents to inform the buyers they owe use tax, and levied a $5-per-violation penalty on sellers who didn’t. It also required sellers to notify the state tax department of purchases and buyers’ addresses. Although a federal district court voided this law in March, the state is appealing.

“This issue isn’t going away,” Mr. Peterson says. “Without definitive congressional action, the states will continue to dream up ways of capturing this revenue.”



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