There is little more instantly satisfying than shopping online. You skip the crowds, have access to countless reviews and have it delivered to your door in no time. Couple that with the ability to occasionally avoid that pesky 6.5%† sales tax and it seems like a no brainer. I mean who doesn’t want to get an instant 6.5%† discount on a purchase?
Why do we get that discount? Well, the general rule of thumb is if the retailer has a physical location in your state they are going to charge you sales tax. What most people fail to realize is that just because your purchase didn’t have sales tax doesn’t mean you don’t have to pay something called a “Use Tax”.
Use tax is essentially sales tax on purchase made outside of your state that will be used in your state that no tax has previously been collected on. Use tax has been around since at least 2007 but is often overlooked because it was based upon the honor system. Individuals are required to calculate and file their Use Tax liability on their state tax returns. I would have to imagine that the bulk of people didn’t realize this was required, and even if they did we are all loath to give the government more money.
The reason this is becoming such a big deal is that recently Connecticut has reached out to over 150 major online retailers asking them for purchases records for residents of that state. Most notably Newegg, an online electronics retailer was requested to turn over their records to Connecticut’s Department of Revenue. Newegg complied and now over 3,000 residents of Connecticut are receiving tax bills for purchases they made as far back as 2014.
This is an important precedent because despite the bulk of states having a “Use Tax”, Connecticut is the first state to reach out to retailers for those records, so they can impose tax bills for those not filing their use taxes. Potentially more troubling is that Newegg was not subpoenaed for that information but gave it willingly. I would have to imagine going forward this is going to become more and more prevalent as states look to recoup taxes lost to online purchases.
If you’re worried about how this could potentially impact you be sure to touch base with your tax preparer or CPA.
† Average national sales tax as per https://taxfoundation.org/state-and-local-sales-tax-rates-in-2017