Get Ready to Pay Taxes on Online Purchases

More states, and Amazon, are collecting from online shoppers.

This could be the last holiday season that online shoppers skip paying state sales taxes. Efforts have been under way since 1999 to collect from more online shoppers. (Taxpayers in states that impose sales taxes are supposed to pay what’s known as a use tax when they’re not charged for online purchases, but few consumers pony up.) The stumbling block has been a lack of consensus on how to streamline and simplify the collection process, and lessen the burden on retailers that would have to remit taxes on behalf of customers to nearly 10,000 jurisdictions with a hodgepodge of rates and rules.

But momentum is building at state and federal levels. And with online retail giant reversing its opposition and taking the lead in support of collections, the days of tax-free shopping are numbered.

Retailers are supposed to have a physical presence in a state to be required to collect taxes. Cash-strapped states, struggling to collect some $23 billion a year in forgone Internet sales taxes, are broadening the rules. As of late summer, 18 states had passed so-called Amazon laws, according to tax tracker CCH. Such laws might require retailers to collect taxes if they derive revenue from online links to an in-state business or if they do business with a local distributor or warehouse. Ten other states have such legislation pending.

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As Amazon sets up more local operations, it has been negotiating one-on-one with states to begin collection efforts. Amazon began collecting sales taxes in California and Pennsylvania in September. The retailer now charges online shoppers in eight states, and from 2013 to 2016, it will start collecting in six others—unless a federal law kicks in first.

Legislation could pass as early as this year. That would give states authority to require retailers to collect taxes on Internet sales, exempting small businesses, as long as states meet minimum requirements to simplify collections.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine (opens in new tab). It might be the best investment you ever make.

Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.