To follow up with my previous post Internet Sales Tax Looms for NY…Will It Catch On? I posed a question along the lines of "do you think it should happen/is it a good idea?"

As of June 1, 2008, the legislation will go into effect, requiring internet retailers to collect a sales tax on any orders being shipped to the state’s residents. This legislation was largely enacted to keep online retail Goliaths (namely Amazon.com) in check and attempt to "level the playing field" for brick and mortar stores in the state.

Amazon has now responded by suing the New York State Department of Taxation and Finance claiming "that since it does not have a physical presence in the state that it should not be required to collect taxes on shipments going to New York." In addition Amazon says the New York law is unconstitutional based on a 1992 U.S. Supreme Court ruling that claims states are prohibited from requiring out of state retailers to collect sales tax unless the company has a physical presence in the state. New York defends the law by arguing that the Amazon Associates program, which allows Web site publishers to receive commissions by promoting Amazon items through their sites make Amazon liable to collect taxes on its behalf for those affiliates who live in New York. (this paragraph courtesy WebProNews.com )

So while the question is no longer "do you think it should happen/is it a good idea?" I now pose these questions to you all: How long before other states enact identical or similar legislation and how do you think it will affect online consumerism?

Internet purchasing is having the same effect on buyers and retailers alike-the enticement of not having to pay sales tax for click-and-charge buying. However, what you may not know is that some products are subject to sales tax and consumers would have the responsibility to pay it directly to their state.

The following is how to determine when sales tax is to be paid. The payment for sales tax is determined by where the buyer lives, rather than where the seller is located. Moreover, if the seller does not have a physical presence in that state, such as a store or warehouse, then sales tax is not required to be collected from the customers in that state.

For instance, a buyer purchases items from a seller located in Kansas and the buyer lives in Colorado. At this point in time, the seller does not have any warehouse or store locations in Colorado; therefore, the buyer does not have to pay state sales tax on items purchased through the seller in Kansas. However, should the seller implement a warehouse or store location anywhere in Colorado, the buyer would then be required to pay sales tax on any items purchased from the seller.

The only exception to this rule is through major retail stores who have established a separate legal subsidiary to handle internet purchases, even though they may have a physical location in a buyers’ state. Therefore, the buyer would not be subject to sales tax. This new practice of large retailers to avoid having to pay sales tax has ruffled the feathers of other smaller retailers who have websites and physical locations and whose customers must still pay sales tax.

Things get a little garbled up due to the some retailers who sell tax-free items online, yet have physical locations where customers can return items to that store. To date, this issue has not been addressed in the courts.

A consumer’s responsibility to pay state sales tax, or more commonly referred to as “use” tax, on internet purchases is largely unregulated as it would be harder for the government to collect taxes on small-ticket items. Their focus is on large ticket items where a license is required, such as cars.

There are some states that are aggressively enforcing the collection of use tax. They include: Connecticut, Maine, Nebraska, New Jersey, and North Carolina. Other states have not attempted it at this point due to the complexity of what would be required to collect the use tax. However, the states are aware that revenue is being lost through internet purchasing and the lack of collection of use taxes, and until the government makes it a priority to collect, the revenue will continued to be lost.

At this point the internet is considered a tax-free zone, for the most part, until Congress decides to change the Internet Tax Freedom Act (ITFA) enacted in 1998. However, with the increase in internet sales and the frustration by supporters for equal taxation for retailers, Congress may be forced to deal with this sooner rather than later.