Internet Tax

Internet Tax

Introduction

For the past 12 years, there have been threats, attempts, etc. to add an Internet sales tax to all goods purchased online. It has been a growing field of sales that has not been exploited for the taxes these sales could generate. The paper presents importance of internet taxes and their pros and cons in a holistic manner.

Description and Analysis

Each November, shoppers across the country jump-start their holiday shopping by participating in “Cyber Monday,” a national celebration of e-commerce where online retailers offer big sales to kick off the holiday season. Every year, more consumers are drawn to the bargain prices. Some may believe their Cyber Monday purchases are tax-free because the vendors did not charge sales tax, providing apparent additional savings. CPAs who specialize in tax know better. Online shopping is one example of supposed “tax-free” shopping, which could also include purchases from catalogs, foreign countries, or states that do not impose a sales tax. This is a misconception. In Pennsylvania, consumers have a legal obligation to remit use tax. The tax is often not paid due to a lack of awareness of use tax among residents, as well as a historical lack of aggressive enforcement by the Department of Revenue. To better facilitate voluntary compliance with the use tax, Pennsylvania added a line for reporting use tax to 2011 Forms PA-40 and PA-41. The instructions include a worksheet to calculate use tax due on taxable purchases. If the taxpayer has incomplete or inaccurate receipts to calculate the use tax on individual purchases less than $1,000, he or she may estimate that portion of use tax liability pursuant to a table based on taxable income brackets.

Sales and Use Tax Basics

Pennsylvania imposes a 6 percent tax on the purchase price of every retail sale of taxable tangible personal property and services. Additional local sales taxes are imposed at rates of 1 percent in Allegheny County and 2 percent in Philadelphia. Sales tax must be collected and remitted by vendors maintaining a place of business in Pennsylvania that sells or leases tangible personal property or renders taxable services. The physical presence requirement is typically met by the presence of company-owned property, employees, or agents in the state. If Pennsylvania sales tax is not properly charged by a vendor, then use tax is payable by the person making use of the property or service at the same tax rates and purchase price used to calculate sales tax (Committee on Fiscal Affairs of OECD, 2008).

Consequences of Noncompliance

Of the 38 states that impose sales and use tax as well as an individual income tax, provide a line on the individual income tax return for taxpayers to report their use tax obligation. The impact of sales and use tax noncompliance on the Pennsylvania economy is twofold: higher effective prices hurt the competitiveness of Pennsylvania brick-and mortar stores and unreported taxes cost the state significant tax revenue. Regarding the first issue, assuming most consumers do not self-report use tax, prices offered ...