Online Shopping, Sales Tax, and You
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There may be a new line on your tax return when you’re filing taxes next year. Have you paid sales taxes on any of your online purchases?
Recently, there was a shopping frenzy in California as shoppers rushed to make major purchases before Amazon.com was required to start charging California sales tax.
What’s wrong with this picture?
California already has a law requiring residents to pay use taxes on their annual personal income tax returns if they don’t pay sales taxes on their purchases from Amazon or other sites. So do many other states.
Why? Most states rely heavily on sales taxes to support the cost of governance—schools, highways, personnel, and so on. With increasing online sales, states have been losing millions of dollars in revenue and are now struggling to continue providing services to residents.
Montana and Oregon assess no sales taxes at all for individuals. States that have no income taxes or sales taxes, such as Alaska, do have sales taxes in some counties. You can find a state sales and use tax map at Governing.com that you can use to look up your state.
How does this affect you?
Online shopping is convenient, and we’re all doing more of it than ever, particularly as we start trusting online payment systems. Being smart shoppers, we can avoid shipping costs via discount codes or by waiting until our purchases add up to enough to meet the vendors’ minimums. We can take advantage of additional discount codes or affiliate discounts and other shopping perks, all without having to fuss with our coupon wallets at the register while shoppers standing behind us get ever more impatient.
We’re not really paying attention to whether or not sites are charging sales taxes—but we should be. If your state is among those that have the Use Tax line on the individual tax return, start saving the information on those untaxed purchases. You’ll need to report them when you file your tax return next April. If you didn’t pay sales tax originally (for example, you purchased an item in a state that doesn’t charge sales tax), you’ll need to pay the Use Tax.
Can you get around all this annoying recordkeeping? You bet! You only need to do two things:
1) Track large purchases—expensive gadgets, electronics, and other high-ticket purchases—that cost $1,000 or more.
2) Use the standard tables from your state’s tax return booklet. The tax may not be much, even on purchases over $1,000. For instance, in California, folks with adjusted gross income under $100,000 will only pay an extra $63 for a year’s worth of purchases, as shown in this chart:
Will your state audit you over this issue? Most likely not, as it’s too small an amount to waste precious auditor time. However, when the state audits the retailer, it will look at shoppers’ accounts—and it will assess you on that basis. Also, if the state audits you for other reasons, this could be picked up.
Should you worry? Not really. Even when underpaying $50 to $100 worth of taxes, the penalties are minor. But do think about it. If your state is closing libraries and cutting medical care, road maintenance, and school services, this could be a way to help.
Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered. Eva is the author of several books and ebooks, including the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.
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