Beware the online mystery tax

One reader's investigation into a mysterious tax on an online purchase raises the specter of online sales tax once again

Gripe Line reader Ken wrote to complain about a mysterious tax that was added to a recent order he placed for a Seagate hard drive.

When he questioned customer support about the fee, "They said the $2.00 additional charge was for 'Sales and other taxes,'" he explains. This might seem reasonable to most, but Ken was sure he didn't owe this tax.

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"I live in New Hampshire and there is no sales tax here. I know it is only $2 but as a native of the last state without an income or sales tax, it is the principle that bothers me," he says.

When pressed, the customer service representative called the tax a "shipping tax" and, later, a "state tax." None of this did anything to mollify Ken's ire. "I have placed many online orders in many different states over the years and I never had to pay any sort of tax before," he says.

I forwarded Ken's gripe to Seagate, but the company declined comment. Ken, however, kept after the company. His representative eventually told Ken, "I was misinformed regarding the tax. The extra amount was an authorization or pending charge, to make sure enough money is available to cover the total." He assured Ken that he would not actually be charged the $2 fee. Ken isn't really buying that story and suspects he was simply charged the tax by accident, and it was removed when he pointed out the mistake.

I suspect that Ken's irritation over this $2 tax is matched by the states' fury over sales tax (not just New Hampshire but a handful of others that stay out of the fray by not charging sales tax) and merchants who sell via the Internet. The situation is a confusing mess that costs the states millions in potential revenue and creates a bookkeeping nightmare for merchants. Consumers who live in states that do charge sales tax have been benefitting from the confusion by not paying sales tax for many items purchased online.

According to Richard Stim, in an article entitled "Sales Tax on the Internet":

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.

However, anyone who lives in a state that charges sales tax is obligated to pay that sales tax -- including for purchases made online -- even if the online merchant doesn't collect it. Collecting sales tax for the states is an enormous logistical hassle that merchants would like to avoid because each state has its own rules about what gets taxed and how much. Thus, merchants only do it when they have to, but getting consumers to tally up these purchases and their respective taxes at the end of the year has been a bit of a hopeless situation for the states, who, nonetheless, would very much like to have that money. Sales tax is second only to income tax as a revenue source for the states.

Naturally, the states would like merchants to collect that tax. In fact, the states would like to find any way to milk a bit of money from the Internet. Earlier this year, Web publishers in North Carolina lost a significant source of income when Amazon terminated that state's affiliate marketers after the state instituted an advertising tax it hoped would help flesh out its coffers. Despite this backfire, Alabama, California, and Colorado are currently considering similar taxes. (You can read more about that at the Performance Marketing Alliance.)

To help clean up this sales tax mess, the Streamlined Sales and Use Tax was created in 1999 to simplify sales tax collection for merchants. Forty-four states are currently part of this cooperative effort, and to date, 23 have passed conforming legislation.

My point? This is still one gigantic confusing mess for merchants no matter how motivated the states are to get what they feel is their due and in spite of efforts to clean up the mess. Thus, I would tend to agree with Ken that his mystery fee is very likely the result of confusion brought about by this rat's nest of rules and regulations.

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