While you were shopping for gifts online, you may have been able to hit the checkout button without paying either sales tax or another type of levy you may not have even heard of — “use taxes.”
This year, Cyber Monday sales in the U.S. reached $3.45 billion, up 12.1 percent from the year-ago period, according to Adobe Digital Insights.
Based on where you live and whether your retailer has a physical presence in your state, you may have been able to make your purchases free of sales taxes.
States’ coffers go wanting due to failures to collect levies from online purchases. The National Conference of State Legislatures estimated that states missed out on $23.3 billion in tax revenue in 2012.
Here’s a holiday surprise: You might be on the hook to pay those taxes after all.
States’ approach to sales taxes for online and catalog purchases is tied to a 1992 Supreme Court case, Quill Corp. v. North Dakota.
The court ruled that states couldn’t require retailers to collect sales taxes unless they had a physical presence in the same place where the buyer is located.
Major online retailers — namely, Amazon — more and more fall under that rule by building data centers, warehouses and other facilities in multiple locations.
This means they have to collect taxes in a large number of states. See below.
Even if your online retailer doesn’t assess a sales tax because it doesn’t have a brick-and-mortar location in your home state, your state may require you to pay use taxes on your purchase, according to Richard C. Auxier, a research associate at the Tax Policy Center.
Use taxes, which apply to items you buy outside your state of residence, generally are assessed at the same rate as a sales tax. The burden of reporting use taxes falls to the consumer, Auxier said.
“Everyone owes taxes on online purchases, be it from Amazon or a small retailer,” he said. “The question we deal with is ‘Who collects the tax?'”
States that assess use taxes give their residents a way to report it. California, for instance, provides a worksheet for taxpayers to calculate what they owe.
New York, meanwhile, offers forms for reporting these levies when you file your income tax return. In the Empire State, you may be subject to penalties and interest on any back use taxes.
In reality, states haven’t been particularly stringent about collecting these use taxes — and many shoppers don’t even know they owe.
“Very few taxpayers report it, even when systems are in place to make use tax payments easy,” said Auxier.
As a result, a coalition of 24 states has adopted the Streamlined Sales Tax Agreement, which allows retailers to voluntarily collect taxes.
In practice, it’s easier for online merchants to add the tax at checkout, as opposed to having states pursue residents for levies owed on purchases, Auxier said.
Expect your use tax holiday to come to an end as online retailers expand their operations into more states.
“I’m not going to look down upon or congratulate anyone, but there’s something to be said about being a good resident and paying the use tax,” said Auxier.