NCPA - National Center for Policy Analysis

Internet Purchases Aren't Exempt From Sales Tax

March 1, 2000

The current temporary ban on imposing new taxes on the Internet has nothing whatsoever to do with whether state sales taxes are due on Internet purchases. It applies only to new taxes on the Internet itself, such as on Internet Service Providers. The constraint on taxing Internet purchases is largely a practical one, compounded by a Supreme Court ruling.

Passage of the Internet Tax Freedom Act in 1998 did not change taxation of Internet purchases. The rule for such purposes is the same as it has been for decades on out-of-state and mail-order sales.

  • In theory, use taxes apply to all such purchases; however, states find it very difficult to collect use taxes because they are not withheld by the seller.
  • Consumers must voluntarily remit most use taxes; but since the chances of being caught are virtually nonexistent, few people pay them.
  • A study by the Federation of Tax Administrators found compliance with state use taxes to be very low even before Internet sales took off.

Furthermore, state laws already exempt most of what is sold over the Internet. State sales taxes generally apply only to tangible goods, whereas virtually all services are exempt, as well as such things commonly purchased over the Internet as airline tickets and stock trades.

The Supreme Court ruled in Quill Corp. vs. North Dakota in 1992 that states could not compel a seller to withhold sales taxes unless the business had a physical presence in that state. Thus some Internet sellers with operations in many states, such as Barnes & Noble, have set up their Internet sales operations as legally separate companies. Since has no physical presence outside of where its computers and warehouses are located, no sales taxes need be charged on most of its sales.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 1, 2000.


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