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The End of Tax-free Online Shopping?


One of the big advantages of shopping online — avoiding the sales tax — could be gone in a matter of years.

Today’s Wall Street Journal has an article on the strategies uses to avoid charging sales tax in most states, which helps the online retailer undercut its local competitors’ total price by up to 8%. Currently, 45 states have laws that require any retailer with a physical presence there to collect tax on in-state transactions. Some states go further, requiring collection if the retailer develops products in the state or has online-advertising affiliates based there. It’s a matter of time before tax is collected on all online purchases, says Scott Peterson, executive director of the Streamlined Sales Tax Governing Board, a state collective.

In addition to the growing number of state laws governing online sales tax, Congress is currently considering a national tax for online retailers. At the heart of the matter: lost revenue, reports the WSJ. A 2009 report from the University of Tennessee estimated that state and local governments will lose $10.1 to $11.3 billion this year in uncollected sales tax. Consumers are supposed to report untaxed purchases on their tax returns, says Peterson, but few do.

If there’s a silver lining to paying tax on more online purchases, it’s that the money is likely to be used locally to fund services, mitigating the need for more expensive property tax hikes, says Katie Jaques, a lecturer at San Diego State University. “Collected sales tax goes to the buyer’s own state, and is divided up to local governments,” Jaques says. “By not paying it, you’re shortchanging you own police protection, your own fire protection, whatever your local government funds with sales tax income.”

In the meantime, there’s still one perfectly legal way to skirt the sales tax: state holidays. This weekend, 11 different states will temporarily nix sales tax for purchases of clothing, computers, school supplies and other items.


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About Pay Dirt

  • Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to or tweet @SMPayDirt.