Cyber Monday Purchases Puts Focus on Massive Sales Tax Evasion

A tax reform advocate is using Cyber Monday to call on Congress to pass a bill requiring Internet-based retailers to collect and remit sales taxes from online purchases.

In 2011, consumers spent $6 billion during the week after Thanksgiving while shopping online and this yea. It is projected Americans will buy $2 billion worth of products this Monday alone.

Cyber Monday was the busiest shopping day in 2012, but millions of shoppers are evading paying any sales taxes when making those Internet purchases.

That’s because many online retailers such as eBay forgo collecting those levies due to case law in the lower courts, which says the lack of “significant physical presence” inside a tax jurisdiction relieves a retailer from collecting the tax.

All but five states impose sale taxes, which means the burden of paying that levy is passed to the consumer as a “used tax.” That can be a confusing process for taxpayers, which can require a separate out-of-state tax form depending on the state.

“People like you and I are actually responsible for paying the tax on our online purchases,” says Joe Henchman, vice president of the Tax Foundation. “Whether it’s fair or not, I’m not sure. It is very difficult and very few people do it either because they’re not aware of it or they think they shouldn’t.”

Henchman says for most state governments it isn’t worth it to dispatch auditors to collect from individuals who might owe a relatively small amount in unpaid sales taxes.

State governments are seeing a dent in their budgets as a result, however. One congressional report estimates the total lost revenue was approximately $11.4 billion in 2012.

Amazon.com began collecting sales taxes in 16 states, and is one of the few retailers to support the Marketplace Fairness Act that would compel online retailers to collect the tax.

“State governments think they don’t need to simplify their tax systems and make them workable for everybody,” says Henchman, who is support the proposal. “(T)he Marketplace Fairness Act is essentially quid pro quo. It says ‘alright states you can start collecting this revenue but in order to do that you actually have to simplify your systems.’”

The measure passed the Senate, but is stalled in the House where many Republican lawmakers describe it as a tax increase on constituents.

But supporters of the proposal—including many state GOP lawmakers—argue the bill is needed to equalize the marketplace for traditional businesses against their online competitors.

“It does not create a new tax, it simply enforces one that already exists,” says Jennifer Rubenstein, director of the Louisville Independent Business Association. “It is logistically very do-able for the large online retailers that it will apply to, and simply levels the playing field with brick and mortar businesses. Not special treatment, just a fair shake.”

(Image via Shutterstock)

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