Online sales tax assessment and enforcement in the USA

Question

I want to know about the assessment of sales tax for online transactions in the USA (for states which collect such tax).

As I understand, sales taxes are assessed at multiple levels of government: district[s], city, county, and state. These 4 independent rates combine to establish the sales tax rate, which applies to the final sale price of an order delivered to an address within those jurisdictions, to be collected by the seller (or the seller's platform provider), and remitted to each applicable taxing authority at some later date.

Of course, there are exceptions, exclusions, exemptions, etc. -- let's ignore these types of sales.

Some questions:

1. First, please correct errors in the above
2. What authority oversees this process and/or enforces compliance to make sure each jurisdiction is receiving proper tax revenue?
   • For example, the FDA conducts "Undercover Buy Inspections" of retailers to determine a retailer's compliance with federal laws and regulations. Is there a state organization that makes inspections or mock-purchases in-store and online to determine compliance with tax law? If not, what is done to ensure compliance?
3. What is the best way for a consumer determine the exact tax rate applicable to their address?
4. How do businesses determine the tax rate applicable to a consumer's address?
5. Why is it common and acceptable for a single consumer to make purchases from different online sellers at different tax rates?
   • i.e., you might purchase a $10.00 item with $10.00 shipping from each of 5 online retailers, and the total with tax for each of the 5 sales is different
6. What are the consequences for a business found to be collecting the wrong tax (charging the wrong tax rate)? Does it matter the same if they were to overcharge vs. undercharge?
7. To whom would a consumer voice their complaints if they know the tax rate assessed by a seller to be wrong?

Answer 1

2. What authority oversees this process?

6. What entity enforces compliance and hears consumer complaints?

The state tax agency. They go by different names, such as the California Franchise Tax Board, Texas Comptroller, New York State Department of Taxation and Finance, and Florida Department of Revenue.

5. What are the legal consequences of charging the wrong tax rate (collecting the wrong tax)?

This would depend on State law. If you merely fail to file or under-remit, you would likely have to pay a percentage penalty, which may go up depending on time, plus interest.

If you intentionally misrepresent taxes due, that would be tax evasion or tax fraud, which could result in a higher percentage penalty, seizure of assets, a misdemeanor or felony conviction, depending on the magnitude, and potential jail.

4. How can it be explained when non-exempt sales from different online sellers being shipped to a single address are all assessed different tax rates?

Some states use an origin-based sales tax system. For in-state remote sales, the seller collects tax based on the rate in the seller's location. This would be similar as if you had collected the purchase yourself at their premises.

The opposite would be a destination-based sales tax system where the tax rate collected is based on the address the goods were shipped to. Out-of-state sales tax collection is almost always destination-based.

States with generally origin-based tax rates are Arizona, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia. California is origin-based for city, county, and state taxes, but destination-based for district.

This is all broadly speaking, there are complicated state-dependent rules. For example New Mexico is origin-based on some types of services.

i.e., you purchase a $10.00 item (non-exempt) with $10.00 shipping from each of 5 online retailers

Another factor is the taxability of shipping fees is complicated. In some states, "shipping and handling" becomes taxable when the fee charged is different from the fee charged by the carrier, e.g. the store is charging for boxes and labor. In other states, it may depend on the taxability of the items being shipped.

Answer 2

You can determine the sales tax that you should be subject to by determining the applicable sales taxes of each taxing jurisdiction that you live in. There is a fair chance that the state's "Department of Revenue" or similar has that information consolidated. In Washington, you start here and note that Ch. 82.08 and 82.14 are the sales tax chapters. Fortunately for residents in Washington, there is a program that computes tax based on address, which is actually accurate (AFAICT) unlike some unofficial websites.

A vendor is only allowed to charge the correct tax. This imposes an unreasonable burden on online vendors, who have to accurately determine the tax facts of the individual customer. The burden is primarily shifted to the customer, who has to apply for a tax refund. For the most part, the vendor will give a refund when the appropriate paperwork is submitted, but if e.g. the vendor disappears or has no money, you instead apply to the Dept. of Revenue. There are penalties for willfully overcharging sales tax.

Because vendors use different online resources for guessing what a customer's tax is, different taxes may be charged. One service may have better geo-location services: these are "business" details, not legal features.

Answer 3

Responding to 3 and 4

3.How to determine the tax rate from address

10 second google turned up https://www.taxjar.com/sales-tax-calculator which seemed to work well

4. How can it be explained . . .

People are used to paying different amounts when sales tax is involved.

Answer 4

united-states

This answer is limited to a couple of the subquestions that I address in more depth than some of the other answers. I do not try to answer all of the subquestions.

5. Why is it common and acceptable for a single consumer to make purchases from different online sellers at different tax rates?

• i.e., you might purchase a $10.00 item with $10.00 shipping from each of 5 online retailers, and the total with tax for each of the 5 sales is different

Because we live in an imperfect world and some online sellers make mistakes in implementing a sales tax system that is admittedly very complicated. Each seller is given the responsibility of complying with every sales tax law in every place they sell their goods (at least in the U.S.), without pre-approval or review from any government agency.

This could involve 51 state level taxes in the 50 states and the District of Columbia, as well as U.S. territory sales taxes (e.g. the U.S. Virgin Islands, Puerto Rico, American Samoa, and Guam), and myriad local government sales taxes. There are more than 3,000 counties in the U.S. and more than 109,000 incorporated municipalities in the U.S., and a large share of them, as well as a handful of special district governments, have sales taxing authority.

Also, keep in mind that this obligation is fairly new. In the case of Quill v. North Dakota, 504 U.S. 298 (1992), the U.S. Supreme Court held that "absent congressional action, the dormant Commerce Clause still prevented a state from imposing use tax collection liability on a mail-order seller with no physical presence in the state." (Source). Quill turned the mushy rule that had come to amount to the same thing of National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967), into a simple, bright line rule about physical presence in a state.

When a physical presence was required, states required businesses selling goods upon which sales taxes were due to get a state sales tax license that spelled out the rules in detail and could be revoked with devastating consequences for the business (ending its ability to sell sales taxable goods at all) if its violations of sales tax laws was serious enough. So, compliance was easier to achieve and easier to enforce, in the cases where it was required.

But, 51 years after Bellas Hess (which, of course, predates the Internet) and twenty-six years after Quill, in 2018, the U.S. Supreme Court overruled its decisions in Bella Hess and Quill, in the case of South Dakota v. Wayfair, Inc. 138 S. Ct. 208 (June 21, 2018). So, this very complicated legal obligation that applies to every online seller in the world who sells to U.S. based customers is only about six years old.

6. What are the consequences for a business found to be collecting the wrong tax (charging the wrong tax rate)? Does it matter the same if they were to overcharge vs. undercharge?

If the business fails to collect enough tax, the state tax collection agency can bring a tax collection action against it to collect the tax, penalties, interest, and if the non-payment was willful, to impose criminal penalties.

If the business collects too much tax, individual consumers can sue for a refund from the business, or a state attorney general could sue the business for cheating its customers in that state.

The customer could also apply directly for a tax refund from the taxing agency that collected too much tax from the customer, but only if the taxing agency to whom the taxes collected from the customer were accurately disclosed by the online seller and actually paid to the taxing agency as claimed.