The Internet Tax Freedom Act does not mean internet sellers do not have to collect taxes. Presently, e-commerce businesses owe state taxes on items sold to customers who live in states in which the business has a physical presence. This is trickier than it sounds. The tax laws differ somewhat from state to state, but generally, companies are required to pay taxes on transactions that take place in states where their business is headquartered, or where there is a "nexus" between the business and a certain state--like salespeople, trade shows or warehoused goods. Some states even consider heavy advertising in their state as enough of a nexus for a business to owe taxes.

On the Other: Do Not Collect Taxes for Every State

In 1992, the Supreme Court ruled that requiring businesses to collect taxes on transactions with customers who live outside the state where the company has a physical presence is an undue burden on the business. This ruling was made in favor of a catalog company, but applies to e-commerce businesses. The ruling does not mean the customer gets a tax break--right now the burden lies with individuals to report online purchases when they file state taxes.

Bottom Line

Business owners should keep a close eye on state tax laws regarding e-commerce. Legislators know that requiring individuals to voluntarily report their internet purchases is not an effective way to collect taxes on internet sales. As state budgets shrink and vital programs are cut, state legislators will likely look to internet sales as a funding source.

Source:

Center on Budget and Policy Priorities

New York Times: Yes, you owe that tax

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