The Internet Use Tax

Use tax is something that all states with a sales tax have also enacted. It is meant to replace the tax revenue the state would have collected if consumers had bought the same product or service locally and paid sales tax. The only time use tax wouldn’t apply is if the product or service you bought elsewhere wasn’t taxable locally.

The problems with use tax are twofold. First, many consumers don’t know that it exists. Second, use tax collection is voluntary, and works on an honor system. States are counting on you owning up to your online or out-of-state purchases and paying the tax. Their only way to force you to comply is through a state audit – an expensive process that may not generate enough tax to cover its cost.

Some states are concerned about the constitutionality of forcing out-of-state retailers to collect sales tax. They have decided to adopt a different approach – forcing consumers to report use tax on their personal returns. We call this the Internet Use Tax approach. So far it has been adopted by Colorado, North Carolina, Oklahoma and South Dakota.

States adopting an Internet Use Tax law begin with the same idea as Internet Sales Tax: that your business can create nexus with a state through a relationship with affiliate marketers. The difference here is in who is responsible for collecting the sales tax money.

Unlike the Internet Sales tax, with the Internet Use Tax approach you, as an Internet retailer, are not responsible for collecting the sales tax. However, you are required to notify the consumer that they have a use tax obligation to their home state.

The amount and format of the notification varies from state to state. In Colorado, for example, purchasers are supposed to receive a notice at the time of purchase, and again at the beginning of the following year. Sellers are also required to provide Colorado tax authorities with a report listing transaction details, including names, addresses, and amounts purchased during the past year. At the other end of the scale, South Dakota simply wants you to put a notice on your website that appears during the checkout process.

To learn more about the Internet Use Tax, including Colorado’s and North Carolina’s ongoing legal battles to implement the legislation, see the appendices.
For the time being, if you sell to consumers in Colorado, North Carolina, Oklahoma or South Dakota, talk to your CPA or advisor to find out if your sales have made you a target for this new nexus trap.

Nexus is a shifting, slippery target. If you’re concerned that you may possibly have a nexus issue, we’ve got a number of products to help. Our Design Your Own Nexus Strategy product is a 140+ page eBook that talks about all aspects of Nexus, and provides handy checklists and other information to help you determine what may or may not apply to you. We’re also offering a Nexus Evaluation Program where you answer some questions and get a fully customized, detailed report on your specific nexus situation.