Published 1/31/11 (Modified 3/22/11)
By MoneyBlueBook

By MoneyBlueBook Contributor

I recently bought a laptop over the Internet. Shopping online, I found a great price and I didn't have to drive around to different stores to compare products and features. But is it fair that I didn't have to pay any sales tax because I bought the laptop online?

Retailers say the playing field should be leveled out with an Internet sales tax that would be collected at the point of purchase. Now I am not fan of paying more taxes, but the thought of helping put a local company out of business because I like to shop in my pajamas doesn't sit well with me either.

Taxing e-commerce

During President's Clinton administration, the Internet Tax Freedom Act was signed into law to protect commercial aspects of the Internet. The law prohibits federal, state and local governments from taxing access to the Internet or adding taxes that would limit Internet usage. The Internet Tax Freedom Act (ITFA) has now been renewed through Nov. 1, 2014, but the law does not address the collection of sales tax. So a few states have made it mandatory for online retailers to charge a sales tax, while a few others left the burden on the consumer to self-report their sales tax.

The latest twist is that some states have now decided that large retailers like Amazon or Overstock should be forced to collect sales tax even if the sale is run through an affiliate or if the retailer is merely deemed to have a competitive presence in the state. This goes against the spirit of Supreme Court rulings that say only an entity with a physical presence in a state should be forced to collect sales tax. Several lawsuits are now challenging the constitutionality of how the Internet tax is being applied, but for now these laws are on the books.

States making a money grab

For over 10 years the argument for an Internet tax has been advocated back and forth. States argue that they need the extra money to pay for the basic services that we all use. The anti-tax movement has pushed back and tried to keep the Internet free from taxes. What has evolved from this is a hodgepodge system of Internet taxes in a few states, with consumers never really knowing until their e-commerce checkout if they will be charged a sales tax.

Now the Internet tax issue is hitting the headlines and political discussion again. The reason is pretty simple: State governments are broke. Record budget deficits have pushed legislators to examine new ways or re-examine old ways to increase tax revenue. In Illinois, lawmakers recently passed Tax Bill HB 3659 that forces merchants located out of state to charge sales tax if they run an affiliate program within a state. At least four other states also have legislation pending.

What an Internet tax would mean to you

If you live in a state where an Internet sales taxes has been enacted, there are a few things to consider. Right off the bat comes the obvious fact that you may pay more for some of your online purchases. Remember that laptop I purchased online? If I bought from an online retailer or an affiliate based in Illinois, I would now have to pay an extra $75 in sales tax.

It doesn't stop there though. The reality is that as long as some states have the tax and other states don't, online retailers will play a game of hide-the-tax and some consumers may still avoid paying the tax. Amazon has already ended affiliate relationships in several Internet tax states. Other companies are considering moving their operations across a state line to avoid collecting the tax. Reports say that FatWallet, an online business based in Illinois, will move their operations out of Illinois to survive the Internet sales tax.

If your state adopts an Internet tax, it could threaten local jobs. At the very least, it punishes local companies that compete online. Politicians like to project how much extra income the Internet tax might generate. Yet when the tax has been enacted, so far the extra revenue has fallen short of projections.

One thing is clear: Once you are hooked on the convenience and lowers costs of shopping online, it is doubtful you will want to go back to pounding the pavement for deals. You also won't be crazy about paying sales tax on an item, when others do not. Hopefully the politicians get it right and fix the Internet sales tax mess they are creating.

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