How online shopping taxing works in USA?

If I understand properly looking at the FAQ on Amazon website:

Items sold by LLC, or its subsidiaries, and shipped to destinations in the states of Kansas, Kentucky, North Dakota, or Washington are subject to tax.

If destination address is different than the states mentioned above then there is no tax. It is related to the physical location of warehouses of Amazon. Does it mean that Kentucky citizens are somehow 'hurt' by such tax and do online shopping in other shops? Around 10% percent for a tax is a pretty high value so doesn't it mean non taxed internet shopping is booming because of it? Does it mean American citizens do more shopping online than in the normal shop to avoid taxing?

1 Answer

  • 1 decade ago
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    The way it's supposed to work.....

    The courts have ruled that if a mail order or internet firm has a physical presence (“nexus”) within the state it must collect sales taxes.

    The way it actually works.....

    Many national chains contend that their e-commerce operation is a distinct legal entity, unrelated to their bricks and mortar stores. This practice is known as "entity isolation".

    At least six states -- Alabama, Arkansas, Kansas, Indiana, Louisiana and Minnesota -- have amended their sales tax nexus laws to clarify that entity isolation does not absolve internet retailers of state sales tax obligations. The Multistate Tax Commission has drafted model legislation aimed at entity isolation.

    On the other hand, courts in three states -- Ohio, Pennsylvania and Connecticut -- have upheld entity isolation as a means of avoiding state sales taxes.


    I wouldn't say that citizens in those states are "hurt" by such tax, because they would pay that same tax if they shopped for those items at their neighborhood stores. (Taxes in my area of the USA (Ohio) are about 7.25%; many states have lower; others higher.) Those citizens would normally compare the total internet price for an item to what it would cost them in their neighborhood. They probably would not compare their total internet price to what it might cost them in another state. So, there is not concept of being "hurt" in that sense. Additionally, many people shop on the internet for the convenience, rather than only looking at the taxes being paid.

    Non-taxed internet shopping is booming, of course. What the state of Ohio does is -- on the state income tax form -- ask whether or not you do internet shopping? If you say "yes" then, they ask if you've had any purchases for which you paid no state sales tax? If you say "yes" then, they ask you to calculate how much and pay them the related sales taxes. (Sort of on the "honor system".) I only know one person who says "yes" to both those questions when he files his Ohio state income taxes.

    Though shopping online is growing, it is still very, very small compared to non-online shopping.

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