States Renew Attempts to Collect Sales Tax on Purchases Made Online

Friday, July 8, 2011 at 6:09 PM by

Recently, a number of states have turned their focus to collecting sales tax owed on purchases made from internet retailers. This may be because state tax revenues have been slow to recover from the effects of the recession, leading states to make a renewed emphasis on collecting tax revenues that are owed to the state but are not collected.

This uncollected sales tax can add up quickly. A recent Associated Press article estimated that each year, uncollected sales tax on internet purchases total more than $23 billion nationally. In Wisconsin, the state loses $127 million each year in uncollected sales tax revenue for purchases made online, according to a University of Tennessee study.

When a customer makes a purchase from an online-only retailer that does not have a significant physical presence in the state, such as Amazon.com, sales tax is owed on the transaction just as if the purchase were made at a bricks-and-mortar store. The difference is that for on-line purchases, the customer – rather than the retailer – is responsible for collecting the sales tax, and remitting it to the state when he or she files an income tax return. Very few people actually do that, and enforcement is nearly impossible. As a result, some states are continually seeking ways to shift the responsibility for collecting and submitting the tax from the consumer to the online retailer.

In the past few months, there has been a growing number of states searching for ways to compel online retailers to collect the tax that is owed. The Associated Press article describes efforts in New York, Illinois, Connecticut, North Carolina, Arkansas, Colorado, and Rhode Island. And in recent days, Governor Jerry Brown in California signed a bill that attempts to compel Amazon and similar retailers to collect the sales tax. Results so far have been mixed, and online retailers are fighting back – but some policymakers hope that if enough states put pressure on online retailers, they may make some progress.

Given our current political climate, Wisconsin is not one of the states most likely to be joining the effort to collect the sales tax owed on online purchases. But Wisconsin has taken some steps to make it easier for online retailers to voluntarily collect and submit the tax. For more information, you can read a 2010 Wisconsin Budget Project publication that explains why compelling online retailers to collect the tax has been so challenging, or two blog posts from last year on the issue, here and here.

Tamarine Cornelius

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