June 14, 2013
Online shopping is the latest and greatest way to shop. It may seem simple if you’re surfing eBay or Craigslist, and harmless if you make a purchase or two. Online shopping is fun and easy, and having the ability to order from different parts of the country gives you even more variety. However, many do not know there are laws for taxpayers to voluntarily document goods bought online or out of state.
Now, 24 states have a small line on tax return statements that requests a payment amount for sales taxes on any goods or products bought out of state or from online retailers. The catch is that the states must rely on the moral compass of those inclined to actually include all of their spending that they didn’t have to pay taxes on. It’s up to taxpayers to track what they owe to the IRS. Some do, but most don’t, according to the gap between what should be claimed and what is actually claimed each fiscal year.
States are trying to find some of the $20 billion missing due to online sales tax evasion. That large gap is because states always have a “use tax” on items residents buy from out of state vendors; however, a 1992 Supreme Court decision ruled that out-of-state vendors do not have to collect the tax. It’s up to taxpayers to document what they should owe.
The challenge for the average citizen is to know what to claim taxes on. Many who are ethically adamant about claiming all they owe will go through a rigorous process to find every missing piece. For instance, many dealerships collect sales tax on cars as part of the registration but many online retailers collect only in states where they have a physical presence.
All of these issues do come with a solution. Lawmakers are currently pushing Congress to pass a bill that will create a Streamlined Sales Tax. States would align their rules and then collect tax on outbound sales and revert the funds over to the inbound state. This would lift the burden of the individual to document and know every purchase or fraction of a purchase that should be claimed on annual taxes. So far, 23 states have signed on to the new bill although large swing states like California and New York threaten the bill’s successful passing.
Until broad laws take effect, the average consumer should rely on personal organization to accurately document their taxes. An executive director of the Streamlined Tax Initiative says that he made a spreadsheet that made it very simple to find out what he owed in just a matter of hours.
Practical next steps
- Note the date on this article. It describes the rules as they stood then, and tax procedure changes.
- Start from the notice you actually received: the number in the top right corner and the date printed on it decide what is still open to you.
- Pull your account transcripts before deciding anything. They show what the IRS believes about your account, which is not always what the letters say.
- If a deadline is running or the amount is significant, have someone read the file before you respond.
Official sources for current verification
- IRS Topic No. 201 — The Collection Process
- IRS Publication 594 — The IRS Collection Process
- IRS Topic No. 202 — Tax Payment Options
- IRS — IRS Audits
- Taxpayer Advocate Service — Audits in Person
- IRS — Accuracy-Related Penalty
Important notice
This material provides general information, not legal or tax advice. Tax outcomes depend on the facts, procedural history, applicable law, and current agency guidance. Reading this page does not create an attorney-client relationship.
