Nowadays, almost every business and transaction can be done online, shopping being the most popular. A lot of people enjoy shopping at online retailers. Once they finish transactions, they notice the absence of sales tax for some of their purchases. Though the requirements for collecting sales tax for an online transaction seems rather straightforward, there are a number of exemptions, exceptions and loopholes that can complicate the tax collection process.
Same State Taxes
Unless the business unit has a physical retail presence in the same state as the consumer, it no longer needs to collect sales tax from the purchased item. If the business is a large retailer with stores across the different states, what happens is that a sales tax is collected for every state that the store is located. For instance, a customer living in California, who purchases an item from a store located in Texas, does not need to pay state sales tax. Nevertheless, if the business has a retail presence in California, the business needs to collect sales tax for remission to the state’s tax officials.
When purchasing items online, having a third party payment processors can create confusion. If a business uses a third-party processor, like a merchant account, situated in a different state, it should collect tax on purchases done in the state. This applies even if the business does not have a retail store in the state where the third party conducts the transactions.
Shipping Exception Rules
If a consumer in one state, California for instance, completes a purchase from a New York brand with a store in California, the company must collect tax on that purchase. However, if the consumer wants to have the item shipped to Texas, and the company does not own a store in the state, it no longer needs to collect sales tax on the transaction.
If the business does not collect tax during an online transaction, it is the customer’s responsibility to pay due taxes directly to the appropriate state agency. This form of sales tax known as a “use” tax requires considerable policing by the state tax agency. Nonetheless, many states only collect taxes on very large purchases like automobiles.