Taxing issues: E-commerce sales and use tax

By Cindie S. Rosenzweig, CPA, MS
Hertzbach & Company, PA
and Myron Vansickel, CPA
MS, T.C. Advertising, Inc.
Members, MACPA State Tax Committee

Everyone has heard of the Internet Tax Freedom Act, but what does it really mean? For example, when a taxpayer in Maryland purchases clothes from a catalogue such as L.L. Bean, does any sales tax have to be paid? There is no sales tax on the invoice, but of course we all know that does not mean no sales or use tax has to be paid.

When a taxpayer purchases items from a catalogue and the item is shipped from out of state, sales tax is often not on the invoice. In this scenario, the taxpayer should pay use tax to the state where the taxpayer lives or actually uses the product. We are assuming that the state where the taxpayer lives has sales and use tax. For our purposes we will assume the taxpayer lives in Maryland.

Now what happens if the same clothes are purchased over the Internet? Does the Internet Tax Freedom Act infer that no use tax has to be paid on the purchase? If you answered yes, try again. Use tax must be paid on the purchase just the same as if the clothes were purchased via a catalogue or if they were bought in Delaware and brought into Maryland.

Should an Internet seller collect the sales tax? We all can see that when we order from Amazon.com there is no sales tax on the invoice. Did they fail to properly collect? Does the Internet Tax Freedom Act protect Amazon.com from having to collect Maryland sales tax? The moratorium contained in the Internet Tax Freedom Act does offer a certain protection to Amazon.com and other Internet sellers from being required to collect and remit sales tax in certain states. However, the actual reason Maryland sales tax is not collected by Amazon.com is because Amazon.com lacks the necessary nexus that requires a seller to collect and remit sales tax in this state. If a seller has the requisite nexus, the sales tax will be on the invoice, the purchaser will pay the sales tax with the purchase and not be responsible for the use tax. The lack of sales tax on the invoice has nothing to do with the fact that the sale took place over the Internet.

So what does the Internet Tax Freedom Act do for the taxpayer? First, the state cannot impose taxes on access, unless such tax was generally imposed and actually enforced prior to Oct. 1, 1998; and the state cannot impose multiple or discriminatory taxes on electronic commerce. The moratorium contained in the Internet Tax Freedom Act will not prevent a state from continuing to collect a tax that was on the books prior to Oct. 1, 1998 that is otherwise permissible by or under the Constitution or other Federal law. The moratorium ends three years after the date of enactment, which will be Oct. 1, 2001.

If a state did not have a tax on the books prior to Oct. 1, 1998, the state cannot impose an obligation to collect and remit sales tax on a company simply due to the sole ability to access an out-of-state computer server. In other words, the fact that our customer in Maryland accesses Amazon.com’s Web site from an out-of-state server, does not create an obligation on Amazon.com to collect and remit Maryland sales tax. However, as pointed out earlier, the fact that Amazon.com is protected by the moratorium from being obligated to collect and remit Maryland sales tax, the moratorium does not relieve the consumer from his use tax liability.

A discriminatory tax is a tax on an item that if purchased via another means would not have been taxed. For example if a state does not charge sales tax on clothes when purchased in a store but imposes sales tax on the same item when purchased via the Internet, that would be a discriminatory tax. A tax may also be considered discriminatory if there are rate discrepancies or certain people or entities are obligated to collect or pay tax while other people or entities do not have the same obligation for the same or similar items.

The Internet Tax Freedom Act also created an advisory commission to study the e-commerce and tax issues. While the advisory committee failed to meet its required two-thirds majority before reporting to Congress, the committee did send a report that had an approval of a less than two-thirds majority to Congress. Included in the proposals submitted by the committee were a permanent prohibition on states and localities from taxing Internet access and extending certain parts of the moratorium among others.

Among the vital issues that require careful consideration is balancing the revenue drain on the states created by Internet purchasing due to the difficulty of administering and enforcing use tax on consumers and the free flow of interstate commerce. Other issues that require consideration include equity in the tax system, in-state vendors ability to compete with out-of-state vendors, the ability of the states to administer and enforce their existing and new taxes, the ability of states to maintain their needed revenue, among other various important economic issues. Maryland is going to be working with other states to develop a voluntary, streamlined sales tax collection and administrative system. Congress is also addressing these issues, but we are a long way away from a permanent and equitable solution.

This content has not yet been Rated.

To Rate content, please Login.