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There seems to be a general misunderstanding among the general public regarding internet taxes. The following information applies to the United States. On November 1,2007, President Bush signed into law the “Internet Tax Freedom Act Amendments Act of 2007″. This law prohibits state and local government from taxing Internet access and electronic commerce. The act will now expire Nov. 1, 2014. What this means is that your state, county or city cannot add a tax to your internet ISP bill as they have done on your telephone, gas and electricity bill. 

This does not mean that the internet is a tax free zone. Even though you may not be charged a sales tax when you buy online, you may still be liable for that sales tax. If you wonder why some retailers charge you a sales tax and others don’t, here is the reason:  If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence. If your state collects sales tax, you are required to pay the tax to your state if the internet retailer did not collect it. When you pay a tax directly to the state it is called a “use” tax rather than a sales tax. Most likely you won’t find the state coming after you to collect this tax. However, if you buy a car or boat online, you may get a friendly letter asking you to add this tax on your tax returns. It is estimated that California loses about $1 billion in lost tax sales each year due to the internet.

As more and more people use the internet to shop online, you can expect states to put pressure on Congress to write laws that try to overturn the 1992 Supreme Court decision. States collect about $150 billions each year from sales tax. These taxes pay for schools, the police, the building of roads, parks and other services.   

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