Taxation on Products Purchased on the Internet
One of the more controversial areas of taxation today is the area of internet sales.
There is a lot of State Laws and Regulations that are being put up to try and collect taxes from online business.
However, there are still a lot of loopholes for tax collection on internet-sold products.
In fact, some online product merchants are selling products with the marketing slogan that "products are tax free" to woo buyers into doing business with them.
However, there are various taxation rules that affect products purchased on the internet.
According to the Federal Laws as interpreted in a Supreme Court hearing, a state cannot require a merchant to collect sales tax on their behalf if the merchant is not physically located in the state.
Therefore, if one buys products from an online website, the online merchant will only withhold a Sales Tax if they are physically situated in the same state as the buyers.
However, since online merchants will normally operate from one state or from a few states, it means that they will not charge sales taxes for the goods sold to buyers in all the other states in which they are not based.
However, to ensure that local sellers get a fair deal and that imported goods do not end up being cheaper because of the lack of sales tax, states that levy a sales tax on products will normally charge a Use tax on imported products at the same rate as the sales tax that applies locally.
In other words, if vendors in a given state are expected to withhold a sales tax of 5% for goods sold within the state, then anyone who buys goods from outside the state will be expected to report and pay a Use tax of the same amount of 5% of the purchase price.
If the disclosure and remittance of the Use tax was followed as per requirement, then there would be no tax issue at hand.
However, since many people do not pay Use tax on products purchased from the internet, the online merchants will normally have an unfair advantage over local merchants.
Since collection of Use tax on small internet purchases is uneconomical for most states, many have allowed the Use tax to fall through the cracks.
Collection is mainly enforced for the large purchases such as purchases of cars or other items requiring a license.
However, in the recent past, there are many states that have increased awareness to its residents on the requirement to report and remit the Use tax.
On the other hand, to avoid withholding state tax at all, in the past, many online merchants have registered legal entities separate from their main-operations to handle the internet-related aspect of the businesses.
These legal entities have no physical state presence to avoid withholding any sales taxes for any given state.
However, this option is no longer viable for most online merchants after various states came up with the Streamlined Sales & Use Tax Agreement (SSUTA).
This agreement was entered into by 40 States and it worked towards ensuring that various interstate laws governing internet sales were unified among the States.
Besides unifying the State Laws that govern Use tax and taxation of internet products, the SSUTA is also seeking federal involvement in assisting the collection of sales taxes from internet merchants.
If the efforts of the SSUTA are successful, online merchants may soon be required to collect sale taxes for all products sold online.
There is a lot of State Laws and Regulations that are being put up to try and collect taxes from online business.
However, there are still a lot of loopholes for tax collection on internet-sold products.
In fact, some online product merchants are selling products with the marketing slogan that "products are tax free" to woo buyers into doing business with them.
However, there are various taxation rules that affect products purchased on the internet.
According to the Federal Laws as interpreted in a Supreme Court hearing, a state cannot require a merchant to collect sales tax on their behalf if the merchant is not physically located in the state.
Therefore, if one buys products from an online website, the online merchant will only withhold a Sales Tax if they are physically situated in the same state as the buyers.
However, since online merchants will normally operate from one state or from a few states, it means that they will not charge sales taxes for the goods sold to buyers in all the other states in which they are not based.
However, to ensure that local sellers get a fair deal and that imported goods do not end up being cheaper because of the lack of sales tax, states that levy a sales tax on products will normally charge a Use tax on imported products at the same rate as the sales tax that applies locally.
In other words, if vendors in a given state are expected to withhold a sales tax of 5% for goods sold within the state, then anyone who buys goods from outside the state will be expected to report and pay a Use tax of the same amount of 5% of the purchase price.
If the disclosure and remittance of the Use tax was followed as per requirement, then there would be no tax issue at hand.
However, since many people do not pay Use tax on products purchased from the internet, the online merchants will normally have an unfair advantage over local merchants.
Since collection of Use tax on small internet purchases is uneconomical for most states, many have allowed the Use tax to fall through the cracks.
Collection is mainly enforced for the large purchases such as purchases of cars or other items requiring a license.
However, in the recent past, there are many states that have increased awareness to its residents on the requirement to report and remit the Use tax.
On the other hand, to avoid withholding state tax at all, in the past, many online merchants have registered legal entities separate from their main-operations to handle the internet-related aspect of the businesses.
These legal entities have no physical state presence to avoid withholding any sales taxes for any given state.
However, this option is no longer viable for most online merchants after various states came up with the Streamlined Sales & Use Tax Agreement (SSUTA).
This agreement was entered into by 40 States and it worked towards ensuring that various interstate laws governing internet sales were unified among the States.
Besides unifying the State Laws that govern Use tax and taxation of internet products, the SSUTA is also seeking federal involvement in assisting the collection of sales taxes from internet merchants.
If the efforts of the SSUTA are successful, online merchants may soon be required to collect sale taxes for all products sold online.
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