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Internet Sales Tax Vs. Brick & Mortar Sales Tax

Author: Ethan Smith

The sales tax at a brick and mortar store is reflective of a state's base sales tax plus local sales taxes imposed by counties and cities. Some states have placed exceptions on sales taxes; a common exception is on staple food items. A sales tax is usually collected by the business owner or store from the customer at the time of purchase. The funds collected by the business are not revenue; rather, they are used to pay the state or local government that mandates the sales tax. An Internet sales tax is a special tax on goods purchased online rather than in a brick and mortar store or through a mail-order catalog.

Sales Taxes at Brick and Mortar Shops

If a sales tax is imposed, its presence implies the business has a nexus to the government collecting the tax or a relationship cemented by physical location. When the nexus of a business cannot be traced to a given location, as is oftentimes the case with Internet companies and mail-order catalogs, sales taxes do not need to be paid, but the state may instead impose a use tax on the consumer who purchases items from a business located out of the state.

The purpose of a sales tax is to give tax revenue to the local and state government in the location where a business enables its transactions. In exchange for the business' ability to conduct transactions within a given location, taxes are collected. A state government or a local government may raise its sales taxes in an attempt to manage an economy or create a sales tax to collect revenue from key industries that depend on the local infrastructure of a city or state to operate.

Each state has its own sales tax rate, though some states do not have a state-wide sales tax, including Alaska. Sales taxes have the effect of making purchases more expensive for consumers. Certain goods such as prepared meals, hotel rentals and car rentals are regulated in a different manner from other goods, and a state may decide to place a special rate on these services and goods.

To encourage an industry's business transactions and operation, a state can subsidize its sales taxes and offer a reduced rate or a rebate. Education is one industry that is often heavily subsidized by a state to promote its activities.

Internet Sales Tax

The sales tax is placed on goods and services depending on the location to which a customer requests a package be mailed rather than where the business' IP address is located or where the customer paying for the goods lives. For instance, if a person living in Florida wants to send a gift purchased from a company in New York to a friend in California, if there was an Internet sales tax, then the good is taxed at the rate in California. Some states such as California see no distinction between goods purchased in stores and online and have stated it is the consumer's duty to file use taxes on goods that were not charged a sales tax at the point of sale.

Internet sales taxes are placed in an effort to maintain competition between brick and mortar stores and virtual stores while siphoning desirable tax dollars from large online vendors such as Amazon.com into the states to which packages are sent. When consumers purchase goods online from large retailers that have a physical presence or warehouses, they are more likely to incur an Internet sales tax; however, this is dependent on the laws and regulations of a given state. There are some retailers online, in particular those that have no warehouse in the United States or deal exclusively in Internet arbitrage sales, that do not charge sales taxes.

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