Bargains for Under $25 HP Envy 34 All-in-One PC Review Best Fitbits T-Mobile Data Breach Settlement ExpressVPN Review Best Buy Anniversary Sale Healthy Meal Delivery Orville 'Out Star Treks' Star Trek
Want CNET to notify you of price drops and the latest stories?
No, thank you

States push to tax Net shopping

Tax collectors warn that on April 17, Americans had better fess up to what taxes they've avoided through Internet shopping--or else.

Did you buy anything through the Internet last year without paying sales tax at the time?

If you did, state tax collectors warn that you'd better say so by April 17 and write a check--or else.

Online purchases from sites like and eBay may seem to arrive in a state of untaxed bliss. But the law actually requires shoppers to pay their own state's sales tax rate--the concept is called a "use tax"--and voluntarily cough up the exact amount owed each year at tax time.

Tax bureaucrats for years have lamented the difficulty of collecting use taxes on catalog and mail order sales. Now, with online shopping growing rapidly and nearing $100 billion a year in consumer sales, tax collectors are adopting more aggressive tactics.

New York state has added a line to income tax returns requiring all residents to calculate how much they should pay on Internet, mail order or out-of-state purchases. The threat is explicit: Anyone who creatively underestimates will face stiff penalties if an audit occurs.

"If you've written zero or left it blank, during the audit we're going to make you produce your financial records, bank statements, credit card statements," said Michael Bucci, a spokesman for the New York Department of Taxation and Finance. "If we find out you have made purchases you haven't reported to us, not only are you going to be liable for the amount owed, the tax liability, but also interest and penalties, which...could be up to three times as much as what you actually owe."

For the first time this year, California has taken its thou-shalt-pay-up warnings to the Internet through banner advertisements on four newspaper Web sites. One on the Sacramento Bee's site warns: "Make online purchases? You might owe use tax." (It has the benefit of being easily, and accurately, misread as "You might owe us tax.")

"We won't know how effective any of this is or how much money comes in this year until after April 17," said Anita Gore, a California Board of Equalization spokeswoman. Gore said the campaign has resulted in 8,000 clicks so far--not many, though, in a state with a population of some 36 million people.

If you buy something over the Internet or a catalog from a business with an office in your state, expect to see sales tax added to your receipt automatically. For example, a digital camera bought through would likely be taxed because the company has stores all over the nation, but the identical purchase from B&H Photo and Video would be shipped tax-free to anyone not in New York state. (Some states such as Delaware and Oregon have no sales taxes at all, of course.)

A dispute over missing revenue
It's not clear how much use tax goes uncollected. For one thing, the vast majority of Internet and remote purchases are made by businesses, which state tax agencies acknowledge are highly likely to comply with use tax laws.

Business to consumer e-commerce sales were $86.3 billion in 2005, up about 58 percent from the year before, according to the U.S. Commerce Department. (Business-to-business sales are about 12 times greater.) At an average tax rate of around 6.5 percent, that means the total amount of use tax due from consumers would be a maximum of $3.6 billion.

What's not taxed

California says its annual revenue lost to nonpayment of use taxes--including mail order and business-to-business purchases--is $1 billion. Washington state puts its lost revenue at $600 million; Pennsylvania at around $500 million; Connecticut claims some $230 million.

Not everyone buys those figures, which are calculated by tax agencies that may have their own incentives to embellish. Steve DelBianco, executive director of the NetChoice Coalition, said those numbers are overestimates.

"Nine out of every 10 dollars in e-commerce is business to business--that means business users, the vast majority of which pay their use taxes as a result of effective state audits," said DelBianco, whose coalition counts 1-800-Contacts, eBay, Orbitz and Yahoo as members.

Opponents of giving the government a larger percentage of Americans' disposable income say use tax collection efforts go too far.

"Unless we assume the tax man has the moral right to your entire income, I don't feel anyone should be obligated to pay" the use tax, said Lew Rockwell, an economist who writes frequently about taxation and government. "They already extract so much from us with little in return, just wars and welfare and general social trouble. The idea that we should turn over more is just outrageous."

Innovations in "use tax" extraction
States vary in how much force they apply when trying to squeeze use taxes out of taxpayers.

"One reason we want to collect the use tax and have been very aggressive about it is that 100 percent of the sales tax goes to education--the use tax does too," said Danny Brazell, a spokesman for South Carolina's Department of Revenue.

South Carolina is one of the more diligent states--or from a taxpayer's perspective, one of the most brutal. It has signed a deal with the U.S. Customs Service to obtain records about state residents who import expensive items from abroad; has sent out random mailings to taxpayers; and has added a line to its income tax return.

It's also trying to strong-arm large companies that are not legally obligated to collect taxes to do it anyway. "We're working with major retailers--don't want to give any names of course--to have them collect the tax and send that amount to the state of South Carolina," Brazell said.

Washington state has no income tax, so it's at a disadvantage when trying to collect use taxes on a form due on tax day, said Mike Gowrylow, a spokesman for the state Department of Revenue. Complicating the situation is the lure of shopping in nearby Oregon, he said, which has no sales tax.

"We try to enforce the use tax when we can come up with a paper trail, like artwork, boats, planes and other vehicles," Gowrylow said. "Very few people pay it...It's a huge problem."

Tim Connolly, a spokesman for the Massachusetts Department of Revenue, said the government tries to "make people aware that they should be paying" use taxes. In 2004, Connolly said, line 33 was added to state tax returns along with a table for use tax calculations on purchases less than $1,000.

Pennsylvania directs most of its use tax collection effort at companies rather than individuals, said Steve Kniley, press secretary for the Pennsylvania Department of Revenue. "We have just begun a pretty concerted effort to encourage use tax payments by business," Kniley said.

"In the event that we were auditing one of our customers, one of our taxpayers, if we found a use tax liability, yes they would be held accountable for that and there would be penalties."
--Anita Gore, spokeswoman, California Board of Equalization

A proposal to add a use tax collection line on state tax returns has stalled because of an unusual reason: the relative simplicity of Pennsylvania's tax code. State residents enjoy a 3.07 percent flat tax on income, with no brackets or personal exemptions, ranking the Keystone State with Colorado and Rhode Island as some of the most straightforward among the states with an income tax.

"Our issue right now is we don't have room" on the tax return, Kniley said. "Right now we have a two-page form, and we would have to go to a third page, and there are all kinds of issues with that...It would be a significant expense." If Pennsylvania eventually does add a third page, such a requirement easily could show up, he said.

Audits are another enforcement tool. (New York says it does not audit solely on the basis of suspiciously reported use tax numbers.)

"In the event that we were auditing one of our customers, one of our taxpayers, if we found a use tax liability, yes they would be held accountable for that and there would be penalties," said Gore, the California tax agency spokeswoman. Those include an interest rate of 9 percent, and, if negligence is proven, a 10 percent additional penalty.

California residents pay a sales and use tax of up to 8.75 percent in some areas, one of the highest in the nation. Golden State laws are strict: If Californians travel to a state with a 5 percent tax and shop there, the law requires them to write a check to the state tax agency for up to the 3.75 percent difference upon their return.

Ending tax-free Net shopping
If state tax collectors get their way, the days of tax-free Internet and catalog shopping will come to an abrupt end.

The obstacle that state tax agencies are currently facing is a legal concept called "nexus," which means a company can be taxed by a state only if it has a sufficient business presence. Because Seattle-based Amazon does not have offices or shipping facilities in California, for example, it's not required to collect taxes on shipments to that state.

In a 1992 case called Quill v. North Dakota, the U.S. Supreme Court affirmed the requirement of nexus--and said that only Congress had the power to change those rules. (An exception is cigarette sales, which are covered by the Jenkins Act.)

More than 40 states are participating in the Streamlined Sales Tax effort, which is designed to do two things: simplify convoluted state tax codes and make tax collection mandatory for out-of-state sellers.

Once state tax laws are simplified, the theory goes, Congress can be persuaded to eliminate the nexus requirement. Two bills that would do that--and effectively override the Supreme Court's 1992 decision--are pending in the U.S Senate.

One bill was introduced by Sen. Mike Enzi, a Wyoming Republican, and the other by Sen. Byron Dorgan, a North Dakota Democrat who is a former state tax commissioner.

In an opinion article written for CNET in 2001, Enzi warned that online shopping would shrink tax revenues. "The Internet is a sales-tax loophole that is threatening to reduce our local governments' ability to provide the services we have come to rely on," he said.

But because of the fall elections, most observers don't expect Congress to consider the legislation until 2007. Until then, said Brazell, spokesman for South Carolina's tax collectors, "it's still going to be a problem because more people are shopping online."