Brace for E-Taxes

States are eyeing downloads and everything else you buy online.

By Anne Kates Smith, Senior Associate Editor

From Kiplinger's Personal Finance magazine, March 2009

It probably never occurs to you that you're supposed to pay taxes on the stuff you buy online. Nor do most of us have to feed state coffers for the books, movies, music and software we download. Those are sore points with cash-strapped states.

Most consumers are supposed to pay a "use tax" when they buy goods from a retailer that doesn't collect sales tax because it has no physical presence in the state. But most folks don't pay, and few states make the effort to collect, leaving an annual tax deficit estimated at several billion dollars.

Efforts have been under way since 2000 to simplify tax-collection procedures for online and catalog retailers. But so far, just 22 states and about 1,000 retail volunteers participate. This could be the year that Congress passes federal legislation to make collections mandatory, perhaps as part of an economic stimulus package, says e-commerce lawyer Stephen Kranz.

Meanwhile, New York has decreed that even outfits with no presence in the state must collect taxes if they get business referred from in-state sources that benefit from a sale. Amazon.com and Overstock.com are fighting New York in court; expect a ruling this spring.

The debate will be even more heated over efforts in New York and elsewhere to tax downloads. Five states passed download taxes last year, bringing the total to 11; others will consider the issue in 2009, says Kranz. "Budgets are bleak."

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