Are You Reporting Your Internet Purchases?

theodp writes "Over the next week, taxpayers in 19 states will be confronting new sections on state returns that ask them to fork over unpaid sales taxes for items purchased out of state, including Internet transactions. A NY Daily News editorial characterized the addition of use tax to state returns as a rip-off and advised taxpayers to fill in a zero on the line, although an accountant suggests doing so may even be worse than just leaving it blank and put you on the line for tax fraud."

New York

[lake2112]

I know this has been implemented in New York.

Interstate Commerce Clause

[nharmon]

I'm curious, what part of Article 1 Section 8 of the U.S. Constitution don't these boneheads understand?

I know the states get around this by calling it a "use tax", but come on. Do you really expect me to keep track of everything I've bought across state lines just because you charge so much sales tax that the price of shipping makes up for the difference?

Re:Yeah, I can see this working. *cough*

[smackjer]

Mass is definitely one of the states. It's on the tax return under "use tax".

Do you really want to poke the bear?

[Riturno]

Taxachusetts counts. There seems to be a big push to pay use taxes on items not purchased in-state. As I recall there is even a box this year on the income tax form to declare these unpaid taxes. Also remember that Mass. has invested heavily in a new system to catch tax cheats. From the Boston Globe Archives:" STATE'S NEW TECHNOLOGY GATHERS INFORMATION TO FIND TAX CHEATS Published on February 15, 2004 Author(s): Bruce Mohl, Globe Staff If you get the urge to fudge a bit on your taxes this year because you think, "Who's going to notice?" think again. The state Revenue Department is watching. The agency has launched a technology offensive with the goal of pulling together stray bits of information about every Massachusetts taxpayer, searching for clues that would indicate who isn't paying the taxes they owe." http://www.boston.com/business/taxes/articles/2004 /02/15/states_new_technology_gathers_information_t o_find_tax_cheats/

New Hampshire

[djhertz]

Here in N.H. there is no sales tax. I often forget that other states even have sales tax. It seems I am only reminded when I am on vacation, and the clerk wants me to pay $10.55 for the item that is clearly marked at $10.00. Then I get this dumb look from the poor person behind the register, "Uh, sales tax?"

It makes me wonder, how our state can run without sales tax, and without state income tax. I mean, it's a wonder we survive at all! Now, look at Mass, and California, loads of taxes! Boy, those people sure are better off with all those taxes and government programs! But, I digress.

Seriously, if you live in NH, and you buy goods over the Internet, no tax, case closed, Live Free or Die!

Re:Yeah, I can see this working. *cough*

[afidel]

Ohio is one, but then again it was on *last* years form as well. In Ohio at least it's just application of the use tax laws that have been on the books forever to a new area which the states fear could significantly impact revenues. In other words they are just pointing out that you need to report this new area just like you always were, of course from a bit of old research it seems that use taxes were never a big source of revenue due to their inherint unenforcability.

A little misleading

[Ra5pu7in]

As to what states are "adding" this - actually only CA and NY are new to this. The article says they are joining 17 other states that ALREADY did this.

Unconstitutional

[cubicledrone]

Article I, Section Nine:

No Tax or Duty shall be laid on Articles exported from any State.

Additionally:

No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another: nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.

One state cannot tax a purchase made in another state. Taxes are too high as it is.

HRblock

[superpulpsicle]

I just did my taxes with H&R block. I specifically ask whether there needs to be any Internet purchases claimed etc etc. Basically I am avoiding doing taxes twice / audits etc.

H&R Block said NO!!

Which states?

[Xeo 024]

Many of you seem to be wondering which states this affects. Well, according to an article [slashdot.org] posted last month on SlashDot. The following states are collecting Internet taxes:

States with sales tax lines on their tax forms include Alabama, California, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Utah, Vermont, Virginia and Wisconsin, according to the Federation of Tax Administrators.

Read more about it here [myway.com].

Re:Yeah, I can see this working. *cough*

[Anonymous Coward]

The IRS has a pretty comprehensive PDF online debunking most of these schemes.

http://www.irs.gov/pub/irs-utl/friv_tax.pdf [irs.gov]

While clearly the IRS is biased, they do cite many court cases that have legal precident covering many of these loopholes or misreadings of the tax code.

There was also a related article in the LA times last week which touched on the same topics

http://www.latimes.com/business/la-fi-taxman4apr04 ,1,7068670.story?coll=la-home-business [latimes.com] [registration required, blah blah]

Re:How about Washington State.

[HungWeiLo]

That's why many people have moved to Vancouver, WA. Lower property tax, no sales tax in neighboring Portland, no income tax, and mooching off of Oregon tax dollars by traveling on I-205/I-5 everyday.

I got a letter,

[KalvinB]

since I run an on-line business in AZ, telling me to report any internet purchases I had made. I thought about it for a minute and then realized of the two known internet purchases one had been refunded entirely by the company (NewEgg, which resulted in me getting a server case for free after they jerked me around for several months) and the other was less than $100 and had just taken place a couple days prior. It's actually pretty rare that I buy things on-line and I don't keep records unless it's a purchase for the business since it's a tax write-off. The only purchase I could report was a business expense.

The tax only applies if you purchase tangible goods and import them into your state of residence. It falls under a "Use Tax."

If you're not running a business you most likely will not be bothered. I was probably sent a letter not only because I run a business but also because I don't pay any taxes on sales since they're all internet based and out of state. Every month I have sales to report but no tax. It also may have raised a flag.

Ben

Re:Yeah, I can see this working. *cough*

[ceejayoz]

Article I, Section 8 of the US Constitution:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States.

Amendment 16 of the US Constitution:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

Sorry, but I find it hard to argue with that...

Taxing internet purchases is illegal for states

[ad0gg]

States have no right to tax interstate commerce, buying something out of state is interstate commerce and constitution clearly states that states have no right to levy tariffs or taxes on interstate commerce.

Re:North Carolina

[Anonymous Coward]

The NC method is 0.07% NOT 7% of your NC taxable income. Thus they assume that you spend 1% of your income on out-of-state purchases that you owe use tax on.

Re:Yeah, I can see this working. *cough*

[burnsy]

Assuming you did not pay sales tax to the out of state governments.

For example in Ohio...

When the retailer charges you sales tax on your purchase, you do not have to pay additional use tax to Ohio.

Re:It's about time

[Tenebrious1]

Hell, in 20 years, Amazon will control most of the book market in this country, and if they dont' have it, you're fucked.

LOL... sure, whatever.

Suppose Big-Chain-Store stops carrying X. That's when a small shop opens up and starts carrying X. The only way BCS can keep the little guys out of the market is to continue to sell everything they can.

Look at Netflix. They're taking over the rental market by storm. However, they won't shut out all the stores... because they don't carry porn. As long as they don't carry porn, there will be an independent that does. Sure, those indies might have to charge much more, but as long as there is a demand, as long as BCS doesn't carry the product, there will be room for independent retailers.

Yeah, there's no way to directly compete with BCS... that's what small mom-n-pop stores have slowly learned. You can't compete on price, but you can compete on service, convenience, and maybe even selection.

Re:New Hampshire

[proj_2501]

New Hampshire has lots of ski resorts. The restaurants and hotels of the state end up paying resort and meal taxes, and all the visitors to these ski resorts (in a good year they come from Europe!) end up paying a LOT of taxes. In addition, the state operates the only liquor stores and tolls certain highways.

Re:Yeah, I can see this working. *cough*

[nelsonal]

It's pretty common along the Washington(8+% sales tax) Oregon (no sales tax) border too. Incidentally if you live in a state that doesn't have a sales tax you are exempt from other state's sales taxes (probably true about all states, but they might come after you for the use tax if you live in a state with a salels tax). You were supposed to report the items purchased and pay the sales tax on them (mail order too). Companies are only required to collect if they have a physical presense in the state.

my experience

[Anonymous Coward]

posting anonymously for a reason :)

The last couple of years, I did go through my old internet sales receipts and pay the tax on it. Although I *know* I overlooked some purchass :)

This year, my state gave me an option -- either pay an itemized use tax or an assumed use tax baed on your salary. If you pay the assumed use tax, you wouldn't be audited/fined unless you purchased items costing > $1000.

I assumed the actual use tax would be lower if I itemized. So I went through my credit card bills and discovered it would be *far* cheaper to pay the assumed amount than the actual amount.

I think it was about $20. I had about $1000 total of internet purchases (that would have been taxed at 6%).

Re:No No No No no!

[egomaniac]

A friend of mine who's done use tax stuff for banks says that putting a "0" on that line is better than leaving it blank. If you put a "0", you have made a declaration that you don't owe any use tax, which might very well be true. If you put nothing, you haven't filled the form out properly, which is a Bad Thing.

Then your friend has no idea what he is talking about. Non-applicable lines on tax return forms are usually left blank instead of being filled with zeroes. My frickin' tax software leaves such lines blank, so I fail to believe that it's a big audit trigger.

Re:Double Taxation?

[Ryan Amos]

Apple has to charge sales tax in states where it has retail stores. IIRC most states require sales tax on mail/internet orders if the company has a brick and mortar presence in the state. I could be wrong though; IANAL applies.

depends on how you define income

[bodrell]

For a corporation, income is defined (more or less) as profit. In other words, company expenses are deducted from taxes. This is how multi-national corporations set up triangle trading schemes.

In case you aren't familiar with this tax-evasion technique, a corporation sets up a shell subsidiary (in name, an independent entity) is some place like the bahamas. The third part of the triangle is in the country that supplies the raw materials. Say I'm making shoes, and sell them for $100 a pair. Ordinarily that would mean a lot of profit for me, so to lower my apparent profit, I buy the raw materials for $90 from myself (the bahamas subsidiary). The bahamas subsidiary, however, bought the raw materials for $9, not $90, from somewhere in argentina. The US-registered corporation in fact makes a profit of $91 per pair of shoes (less labor and other expenses), but appears to have only made $10 profit per pair. The actual income is in the bahama shell, which has no obligation to pay US taxes.

How does this tie into income taxes? Well, ordinary people don't pay income taxes; they pay wage taxes, which are not the same. If I am allowed to deduct the cost of groceries, rent, gas, tuition, and healthcare, then I'll glad pay 30% tax on whatever's leftover.

Foolish taxpayers-it's OUR money, not yours!

[penginkun]

Or: all your tax are belong to us.

If I understand this correctly, this is how it works. I go to Nevada and buy a TV. I pay Nevada sales tax (which is a lot lower than CA tax) at the time of purchase, and head back to LA.

Now I'm supposed to pay ANOTHER tax to California for...what? The priviledge of USING the item I paid for and have already paid sales tax on?

Sorry, I'm not quite that stupid. But it shows how determined the CA government is to separate us from our money. They tax us to death and then wonder why people move away. Greedy fuckers.

Re:Yeah, I can see this working. *cough*

[Shakrai]

Alabama is one of them, though it doesn't apply it to only internet purchases. It applies to any thing that you bought out of state and brought back home.

That's how New York works. It's pretty interesting to. If you don't actually look at the instructions they provide you with a handy dandy little chart to compute the tax owed based on your income. This is supposed to cover all purchases less then a thousand dollars. But only at the end do they mention that you can put a zero in this line. I wonder how many people that skim through their taxes just paid it without even looking at what it was? Quite the cash cow for the state.

They do apply it to everything though. Quoted from the instructions for IT-201 [state.ny.us] (the New York State standard tax return):

When do you owe sales or use tax?

You owe state and local sales or use tax if you:

• purchase property or a service which is delivered to you in New York State without payment of New York State and local tax to the seller, such as through the Internet, by catalog, from television shopping channels, or on an Indian reservation.

You may also owe state and local sales or use tax if you are a resident of New York State at the time of purchase and you purchase any of the following outside the state:

• property you bring into New York State for use here;
• a service performed on property outside New York State and you bring that property into New York State for use here; or
• a service (such as an information service) you bring into New York State for use here.

(You may be eligible for a credit for sales or use tax paid to another state. See Instructions for Worksheets 1, 2, and 3, Column D, on page 38.) However, you are not required to pay state or local sales or use tax on any property or service that you bring into New York State which you purchased outside of the state before you became a resident of New York State.

You may owe an additional local tax if you are a resident of a locality (county or city) at the time of purchase and you:

• bring property into that locality which you purchased in another locality in New York State that has a lower tax rate;
• bring property into that locality on which you had a taxable service performed in another locality in New York State that has a lower tax rate; or
• bring a service (such as an information service) into that locality which you purchased in another locality in New York State that has a lower tax rate.

However, you are not required to pay any additional local tax on any property or service that you bring into a locality in New York State that you purchased outside that locality before you became a resident of that locality.

So it's not just the Internet they are going after. I don't know what I'm going to do with mine (haven't filed yet). I don't think putting a zero down is a good idea -- it could be considered fraud. That said many tax professionals have told me in the past that they won't audit you unless the amount of cash they can get back is greater then the cost of the audit. It probably wouldn't be worth their time unless you buy tens of thousands of dollars worth of stuff off the 'net or in a catalog.

I'm impressed that it's 18 states doing this. I thought only New York and California pulled this sort of stuff. Guess all the budget crises probably have something to do with it?

Re:Yeah, I can see this working. *cough*

[ceejayoz]

If Article I, Section 8 allowed Congress to pass the income tax as it exists today, and create the IRS as it exists today, then please explain the necessity for the 16th Amendment.

If you'll wipe the spittle off your face, you'll note I quoted the 16th Amendment right below my quoting of Article I.

Ratification of the 16th Amendment was also conditional on its being a temporary measure, as opposed to a cash cow for a massive Federal Totalitarianocracy.

Doesn't change the fact that they decided to keep it, eh? Like it or not, it's a constitutional amendment.

The Founding Fathers specifically stated in two seperate places that the Congress may not lay direct tax, except in proportion to the census. They couldn't have been more clear if they'd carved it into Jefferson's skull and stuck his head on a pike in the middle of Philly.

The Founding Fathers also established an amendment process in Article V, permitting an overwhelming majority of Congress and the States to change the Constitution.

You could always argue that the 16th Amendment repealed these parts of the Constitution, but it does no such thing. Thankfully, the Supreme Court has already taken care of settling any dispute you and I might have about this. They did so in 1916, Brushaber v. Union Pacific R.R. Co., 240 US

From that decision:

"The Sixteenth Amendment as obviously intended to simplify the situation and make clear the limitations on the taxing power of Congress and not to create radical and destructive changes in our constitutional system.

The Sixteenth Amendment does not purport to confer power to levy income taxes in a generic sense, as that authority was already possessed, or to limit and distinguish between one kind of income tax and another; but its purpose is to relieve all income taxes when imposed from apportionment from consideration of the source whence the income is derived.

The Income Tax provisions of the Tariff Act of 1913 are not unconstitutional by reason of retroactive operation, the period covered not extending prior to the time when the Amendment was operative; nor are those provisions unconstitutional under the due process provision of the Fifth Amendment; nor do they deny due process of law, nor equal protection of the law by reason of the classifications therein of things of persons subject to the tax."

Whoops, there it goes. You may find it hard to argue with that, but the Supreme Court would respectfully disagree. If someone has the money to take such a case all the way to the Supreme Court, we might all get a huge (as in 100%) refund from Uncle Sam in the next few years.

Knoblauch v. Commissioner, 749 F2d, 200, 201 (5th Cir. 1984), cert. denied, 474 U.S. 830 (1986) in which the court described the argument that the 16th Amendment was not properly ratified as being "totally without merit."

United States v. Foster, 789 F.2d 457 (7th Cir.), cert denied, 479 U.S. 883 (1986) in which the Court affirmed Foster's conviction for tax evasion, rejecting his claim that the Sixteenth Amendment was never ratified.

United States v. Stahl, 792 F.2d 1438, 1441 (9th Cir. 1986), cert denied 479 U.S. 1036 (1987) in which the Court states: " . . . that the sixteenth amendment has been ratified . . . is conclusive upon the Courts" and upheld Stahl's conviction for failure to file and making a false statement.

Miller v. United States, 868 F2d 236, 241 (7th Cir. 1989) (per curiam) in which the Court said, "We find it hard to understand why the long and unbroken line of cases upholding the Constitutionality of the Sixteenth Amendment . . . have not persuaded Miller and his compatriots to seek a more effective forum for airing their attack on the federal income tax structure." The Court labeled their position "patently frivolous" and levied sanctions against them.

How about...

[RKBA]

CONSTITUTION OF THE UNITED STATES

Article. I, Section. 9. No Tax or Duty shall be laid on Articles exported from any State.

Re:List of States that Collect Tax

[dillon_rinker]

You forgot Missouri, where they call it a "Use Tax." In MO you're supposed to file it if your out-of-state purchases total more than $2,000.

Roads? Are you sure?

[saihung]

>The same way roads were funded up until 1913

E.G. they weren't. Until that point, most roads in this country were unpaved disasters, generally two-land roads. Imagine driving from Boston to Washington DC on all local streets and country roads. It wasn't until the advent of federal taxation and the grants that went along with it that enough resources could be mustered to build large highways (starting with New York State in the 20's thanks to the work of everyone's favorite megalomaniac, Robert Moses).

And don't kid yourselves - parasite states like Delaware (my own) which have low/no income tax, or no sales tax, find ways of compensating for the lack of money. Delaware, for instance, poaches its section of I-95 mercilessly, charging outrageous tolls which cause miles-long backups on the interstate while doing virtually nothing to actually improve the quality of that road - all of the toll money goes to local road construction. Or, another Delaware invention, they attract huge corporations to the state so they can earn incorporation fees, thus earning several thousand dollars for themselves while depriving the original homes of those companies of millions of corporate tax dollars. If you're paying Paul, you've got to screw Peter somewhere.

Re:Yeah, I can see this working. *cough*

[Prune]

It's amazing that the grandparent was modded higher than the parent. Once again, truth takes second place to Slashdot popular opinion...

Re:Taxing internet purchases is illegal for states

[Nate Eldredge]

That's why they don't tax the purchase. They tax the *use* of the purchased item. Sneaky, yes, but apparently legal -- by the time you use the item, there's no longer any commerce going on.