Here in California, we are required to report unpaid sales tax on our California income tax returns, Forms 540.
http://www3.signonsandiego.com/stories/2009/jan/13/1b13webtax01460-states-seek-sales-tax-online-purch/?uniontrib
Web-only companies balk at attempt by governments
By Rachel Metz
NEW YORK — Shopping online can be a way to find bargains while steering clear of crowds – and sales taxes.
But those tax breaks are starting to erode. With the recession pummeling states' budgets, their governments increasingly want to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders.
And that is sparking conflict with companies that only do business online and have enjoyed being able to offer sales-tax free shopping.
One of the most aggressive states, New York, is being sued by Amazon.com Inc. over a new requirement that online companies must collect taxes on shipments to New York residents, even if the companies are located elsewhere.
The amount of money at stake nationwide is unclear; online sales were expected to make up about 8 percent of all retail sales in 2008 and total $204 billion, according to Forrester Research. This is up from $175 billion in 2007.
Based on that 2008 figure, Forrester analyst Sucharita Mulpuru estimates that if Web retailers had to collect taxes on all sales to consumers, it could generate $3 billion in new revenue for governments.
It's uncertain how much more could come from unpaid sales taxes on Internet transactions between businesses. But even with both kinds of taxes available, state budgets would need more help. The Center on Budget and Policy Priorities estimates that the states' budget gaps in the current fiscal year will total $89 billion.
Collecting online sales taxes is not as simple as it might sound. A nationwide Internet business faces thousands of tax-collecting jurisdictions – states, counties and cities – and tangled rules about how various products are taxed.
And a 1992 U.S. Supreme Court ruling said that states can't force businesses to collect sales taxes unless the businesses have operations in that state. The court also said Congress could lift the ban, which remains in place – for now.
As a result, generally only businesses with a “physical presence” in a state – such as a store or office building – collect sales tax on products sent to buyers in the same state. For instance, a Californian buying something from Barnes & Noble's Web site pays sales tax because the bookseller has stores in the Golden State. Buying the same thing from Amazon would not ring up sales tax.
That doesn't mean products purchased online from out-of-state companies are necessarily tax-free. Consumers are usually supposed to self-report taxes on these items. This is called a use tax, but not surprisingly, it tends to go unreported.
In hopes of unraveling the complex tax rules – and bringing states more money – 22 states and many brick-and-mortar retailers support the efforts of a group called the Streamlined Sales Tax Governing Board. The group is getting states to simplify and make uniform their numerous tax rates and rules, in exchange for a crack at taxing online sales.
In response, more than 1,100 retailers have registered with the streamlining group and are collecting sales taxes on items shipped to states that are part of the agreement – even if they are not legally obligated to.
The streamlining board also is lobbying Congress to let the participating states do what the Supreme Court ruling banned: They could force businesses to collect taxes on sales made to in-state customers, even if the businesses don't have a physical presence there.
New Jersey, Michigan and North Carolina are among the largest of the 19 states that have adjusted their tax laws to fully comply with the group's streamlined setup. Washington was the only state to join in 2008, but three more states are close to becoming full members of the group. Scott Peterson, the group's executive director, expects another seven states – including Texas, Florida and Illinois – to introduce legislation in January that would make them eligible to join.
Undoing the patchwork can be difficult, even if the weak economy increases states' motivation to go after online sales taxes. Similar bills have been introduced in several states and failed, sometimes because of the cost of changing tax laws. New York, for example, decided against joining the streamlining board because it would require extensive revisions to its tax rules.
Besides various states and retailers such as Wal-Mart, Borders and J.C. Penney, the National Retail Federation, the industry's biggest trade group, also supports the Streamlined Sales Tax group.
Companies that handle Web sales only have organized as well. NetChoice, whose members include eBay and online discount retailer Overstock.com, supports the states' tax simplification efforts. But its executive director, Steve DelBianco, says online retailers should have to collect taxes only in states where they have a physical presence.
In California, Gov. Arnold Schwarzenegger and legislative leaders who are deadlocked over closing a $42 billion budget deficit have not proposed changes to the state's Internet tax policy.
However, the governor's proposed increase in the state sales tax, so far not gaining traction, would apply to many types of Internet purchases that are currently taxed.
Last year, lawmakers rejected legislation that would have extended the state sales tax to any Internet retailer regardless of where the business was based. A separate measure that could have led to extending the tax to Internet downloads, such as music and movies, also failed.
Staff writer Michael Gardner contributed to this report.
