I picked up this story on the New Mexico Business Weekly about online sales and sales tax. Specifically, it covers why some purchases online are taxed and some are not. Very nice reading for those of us who deal with small businesses who are affected by selling and buying online.
Buying things over the Internet and not paying any tax on the purchase is accepted by many as a fundamental “right”. But that “right” is not as clear as it might seem. Why do some Internet sellers collect the sales tax and others do not?
The answer is complicated and based on rulings by the U.S. Supreme Court. If you are a buyer, you probably think that no sales tax is a good thing. But what if you are a seller who has to collect and you are competing with a seller that does not? What if you are a seller of widgets made in your garage? Do you need to know the tax law and rates everywhere in the U.S.?
Sellers are generally required to collect sales or use tax when they sell to customers in a state where the seller has a “physical presence,” for example a store. In New Mexico, sellers located here are required to pay the gross receipts tax even if they don’t collect it from the purchaser.
If the seller does not collect the tax on sale, the purchaser is supposed to pay the use tax directly to the taxing jurisdiction. Most purchasers do not comply with this requirement and tax-collecting enforcement against individuals is effectively non-existent in most states. In New Mexico, the Legislature has instructed the Taxation & Revenue Department not to take enforcement action against individuals.
This ambiguity with regards to tax collection stems from Supreme Court decisions handed down in 1967 and 1992. In them, the court said that a business must be physically present in a jurisdiction before it can be required to collect and remit sales and use taxes. The principal basis for the Court’s decisions is that, in looking across the country, the sales tax system in all of the states is just too complicated for a seller to contend with if it doesn’t have a presence in the taxing state. In the court’s view, it would be unfair to require a seller of things to have to comply with all of the laws, rates and procedures if the seller did not have a presence in the taxing state.
Although the Supreme Court could change its ruling, or Congress could change the law under its power to regulate interstate commerce, there is no reliable way to predict when or if any of these changes might occur. Legislation has been introduced in Congress to overturn these court decisions over the last several years, but the bills have not progressed.