The Other Internet Tax

The early days of internet shopping brought three huge benefits. First, it gave everyone access to goods that weren’t available at their local mom and pop shop.  Second, it allowed people to find the guy who sold the same item for half the price.  And third, internet sellers didn’t charge tax.  That meant a significant savings, on top of the other benefits.

Of course, government hated the fact that it didn’t get its cut, and so imposed a duty on internet sellers to collect taxes on their sales.  It presented a significant problem for sellers, as every local jurisdiction charged different percentages of sales tax, but that was the sellers’ problem.

A more problematic reason to collect sales tax was that it was killing local business.  Why pay an additional 8.25% for a good?  Brick and mortar stores not only had to pay rent, but had to collect tax. It wasn’t fair that they were put at such a disadvantage to internet sellers.

So, sales tax came to the web, with varying degrees of enforceability. Some laws were based on location, whether a seller had a physical location within the state so that a state could sweep them within its jurisdictional ambit. Others didn’t really care, and imposed taxes on the world.

They couldn’t really do much of anything about sellers who refused to comply, as they weren’t within the state’s jurisdiction.  But buyers?

A call came in the other day because the caller received a letter from his state taxing authority informing him that he owed a significant amount of money in taxes based upon internet purchases.  From 2008 to 2009. From an out-of-state seller who got in a jam with the feds. Who seized the seller’s records and was sending them to the state taxing authorities of buyers.

It appears that the seller had been collecting sales tax on its internet sales, but hadn’t bothered to report them to the state. Oh, yeah. And they kept the money too. It was a really good gig for the seller, collect sales tax because, hey, it’s taxes, you know?  And keep them, thus upping their take by whatever the tax percentage was.  As the company was out-of-state, how would the state know whether it was collecting tax and failing to report or pay it over?

Do you pay the sales tax?  Do you know whether the business that collects the sales tax pays it over to your state?  Even if you asked and they assured you they did, would you know if it was true?

Of course not.

But the law requires the buyer of goods to pay a use tax when the seller of goods fails to pay the sales tax.  Technically, everything you’ve ever bought tax free is subject to a back-up tax by your state, which you are required to pay.

They even have forms for reporting it, even though they’re nearly impossible to find because no one does it.  Until someone in the state taxing authority gets wind of it, and decides to send you a love letter.  And if you neglected to file the form and pay the taxes timely, there are fees and penalties for being a bad citizen who failed to pay his fair share.

But 2008-2009?  What about statute of limitations?  An excellent question, but one that doesn’t interest taxing authorities too much.  While there is a limit to how far back they can go for unintentional failure to pay, most taxing authorities consider purchasing on the internet a deliberate effort to evade sales tax.  And evasion, unlike simple neglect, is evil, so it gets a far longer statute of limitations.

In New York, for example, the taxpayer bill of rights provides for a statute of limitations of three years for failure to pay. But when it’s evasion, the limitation period is doubled to six years.  Of course, buying online doesn’t mean that your purpose was to evade taxes, but taxing authorities know you better than you know yourself. They know in your heart of hearts, your only purpose is to evade their taxes, no matter how much you deny it.

The explosion of internet retailing, the creation of businesses, jobs, revenue, GDP, you name it, came about because the risk of doing business with people you didn’t know, buying items you couldn’t touch, was offset by the benefits online shopping offered and a bit of faith in humankind.

When you get a letter about something that happened almost six years ago, where you did nothing more wrong than trust, that faith may be shaken and the glow of the internet may pale.  But then, what’s more important, your innocent and well-intended internet purchasing, or your state making sure it collects every penny it can?  Somebody has to pay for those bronze plaques bearing politicians’ names to be placed on huge granite buildings.

16 thoughts on “The Other Internet Tax

  1. Voltaire

    I’m glad you included the growth of GDP, businesses, and jobs in this article, which in itself increases the tax base even in individual states. 21st Century nickel-and-diming by state governments…

    1. SHG Post author

      The implications of all of this are staggering, but at the local tax/revenue level, small minds only look at money directly coming in, despite the fact that they’re killing huge revenues for everyone, themselves included. But hey, thinking too hard can cause headaches, and nobody likes a headaches.

      1. Voltaire

        Ahh yes, the classic high tax/low tax argument… The more you tax someone, the more in government coffers, but wait… The more you tax, the less that person/business/entity/etc. has to spend, thus deflating markets they would spend money on. A nice equilibrium point on maximizing personal/government spending is much too politcally charged to be accurate…

        So who best decides? A government whose very being insists a certain amount waste and corruption (even the best run goverments are not immune) and individual politicians whom may direct tax-capital to pet projects that may not be economically viable. Or the citizen and businesses themselves, who may spend selfishly and not provide enough of a safety-net for the less well off…

        It’s the age old economic question.

        1. SHG Post author

          Ironically, I don’t think this really goes to the high/low tax debate, as much as reflecting low hanging fruit for the tax man without anyone thinking, “if this gets out, or out of hand, what could it do to the internet economy upon which we all feed.”

          1. Voltaire

            I agree… Also, after re-reading the comments, I think my previous post doesn’t accurately represent the discussion or article in a meaningful way. I seemed to have “jumped-the-gun” and taken the topic too broad by standing on my soapbox, such is life…

            Alas, it is still early (Pacific Time Zone) and I’m still hungover.

  2. Patrick Maupin

    Ignoring your valid larger points, and focusing in on the poor schmucks receiving the letters, this non-lawyer’s idle speculation relates to whether the defendants can drag the credit card companies into this, under the theory that, despite the card issuers’ valiant attempts at protecting themselves from every exigency, nothing in their lengthy agreements gives notice to the cardholders of the potential liability of the merchant fraudulently converting monies remitted for sales tax.

      1. Patrick Maupin

        Just my naive/creative/wishful reading of 15 USC 1643. SHG says that won’t fly, and I can believe that. I also believe that if a state bothers enough of its residents with such letters, a class action lawsuit against the credit card companies is inevitable, even if it’s founded on the shakiest of legal underpinnings.

          1. Patrick Maupin

            Of course it goes nowhere, but that doesn’t keep it from trying. I’m already living in the rabbit hole — I think I have received more official letters than I can count using both hands and at least one foot, informing me that I was a member of some goofy allegedly wronged class or another. But now that I think about it, I’m not sure I have received any of those since the Supreme Court made binding arbitration binding.

      1. Patrick Maupin

        Where do you find this stuff??!?

        Anyway, that dude’s working way too hard to be idle, in my book.

        1. John Barleycorn

          Why, down rabbit holes of course but every now and then you would be surprised what finds you while spelunking the Library of Congress.

  3. Andrew_M_Garland

    Say I present to the state an email receipt and credit card amount which shows payment of the sales tax to the seller.

    Does this show no intent to evade, and reduce the statue of limitation to three years?

    Does this square me with the state? After all, I had no choice but to pay the tax to the seller.
    Do I become responsible for his crime?

    1. SHG Post author

      First, this isn’t a crime, but an administrative proceeding to collect taxes due. Second, you have to go through two levels of internal administrative review before you get to a court. This is called exhaustion of administrative remedies, and it’s a prerequisite.

      Yes, if you have a @6 year old receipt, it should show that you didn’t intend to evade taxes. Most people don’t. They may accept the evidence at any level of internal review, but the experience for most people is they never seem to change their position despite great arguments and proof to the contrary. So they’re stonewalled and ultimately forced to pursue it in court, where the cost of litigating it is greater than the amount involved. Most people figure its less costly to pay than fight.

      But sure, in a perfect system, you should prevail with that proof.

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