Online Sales, Nexus, and Sales Tax

For those of you who are thinking I missed a typo, no, I didn’t mean to write “Lexus”. I meant nexus, and get used to hearing that word, as it’s something you’re going to hear more about in the near future.

In the last week I read two separate articles about online sales and sales tax. As one article says, budget shortfalls for the states total about $103 billion nationwide. As you can imagine, the states are looking for any way that they can increase their revenue, and one source is sales tax. It’s projected that online sales for 2011 will be about $46 billion, and for fiscal 2012, web sales will cost the states about $11.3 billion in sales tax. That’s a lot of lost revenue!

Needless to say, the traditional ‘brick and mortar’ stores can’t compete against online sales in the sales tax arena, because of one word, nexus. A real basic definition of nexus is a retailer having a physical presence in the state where a buyer lives. If you drive to your local Wal-Mart, you’ll be charged sales tax on your purchases, because Wal-Mart has nexus, a physical presence in your state. If you go online and buy a Kindle from Amazon, you won’t be charged sales tax on your purchase, unless Amazon has nexus in your state (a physical warehouse/distribution center, for example).

Congress and various states have recently gotten into the online sales tax battle with Amazon and other online sellers. Last week, one senator introduced legislation that would require internet-only retailers to add sales tax to their invoices, just as brick and mortar stores do now. One House Representative plans to introduce a similar measure. At issue is a 1992 U.S. Supreme Court ruling which said that online retailers only had to charge sales tax if nexus was present. States are claiming that with all the affiliate programs that Amazon runs, nexus is being created for Amazon in every state where one of their affiliates is located.

Obviously this is an issue with far reaching consequences for businesses both big and small, whether online or brick and mortar, and could mean billions of dollars to the states. Keep your eyes on the news to see how it eventually plays out. If you’re a business making retail sales online, be very careful about who you need to charge sales tax to. And for the consumer, did you know that if you make purchases online and don’t pay sales tax, you’re supposed to claim the tax and pay it on your state income tax return? I can’t speak about all fifty states, but in Virginia, you should be reporting the sales tax on line 21 of Schedule ADJ.

Do you think that sales tax should be charged on internet sales? Leave a comment, and also, let’s hear how many people have reported and paid sales tax on their income tax return.

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