Taxing the Internet
Saddled with a $500 million deficit, Massachusetts has decided to implement the little known and much ignored "use tax" this year. You can find it on line 33 of your Massachusetts Resident Income tax form. The line is labeled "use tax on out-of-state purchases." This includes any purchase made over the Internet or from catalog mail order companies. Examples would include computers from Gateway and books from Amazon.com.
Since 1998, the Internet Tax Moratorium Act has prohibited states from collecting a sales tax from e-commerce merchants and ISPs unless the company in question had a significant presence in the state. The Act was renewed by Bush earlier this year. The Act was meant to ease the burden for online retailers who would otherwise have to devise ways of dealing with each state's unique tax structures.
The ban, however, does not stop individual states from collecting a consumption or use tax from their residents. However, without a way to query the retailers to find out how much consumers spent, the states have very little means of enforcing such a tax. Nevertheless, Massachusetts is asking customers to report their out-of-state purchases for the past 4 years.
"The Massachusetts use tax is 5 percent of the sales price or rental charge of tangible personal property on which no Massachusetts sales tax was paid, where the property was purchased to be used, stored or consumed in the Commonwealth."
Though the tax may be difficult to enforce, it is not impossible. California has gone after both Borders.com and barnesandnobel.com. In each case, they proved that the company's online presence, though technically a separate company, was allied closely enough with their retail stores to justify a "significant presence" in the state. With the aid of such retailers, the states could presumably come back on residents and businesses with the evidence they need to enforce such a law.
It is important to note that this tax affects more than just the Internet. Many people purchase cars and other big ticket items in sales-tax-free New Hampshire. In many cases, they will items purchased in Massachusetts billed and shipped to their out of state residence. However, even in the latter case, where the individual has a residence in both states, the Massachusetts use tax still applies:
"Tangible personal property need not be used exclusively or even primarily within Massachusetts for the use tax to apply. Tangible personal property delivered, shipped, or brought into Massachusetts within six months after purchase is presumed to be purchased for use, storage, or other consumption in Massachusetts' until the contrary is established."
Now, according to the Massachusetts Department of Revenue (MDR) Web site, if you've already paid sales tax on the product, you do not have to pay a use tax. Looking at another document on the MDR site, Do You Owe Use Tax, you also do not owe use tax when:
"Sales or use tax is paid to another state or territory of the United States on tangible personal property to be used in Massachusetts. A credit of up to 5% is given against the sales tax paid. This credit is allowed for sales or use tax paid to another state only if that state has a corresponding credit similar to the Massachusetts credit"
Of course, they neglect to mention which states have a compatible credit. This hints at a world of complexity which this tax can bring to many Massachusetts residents and small businesses. So though the online retailers may have been spared for a short time, it seems that the states are figuring out ways to get theirs, if not from the Amazon.com's of the world, then from the small businesses and residents of each individual state.