State & Local Tax Blog

Do People Shop Online to Avoid the Tax — Looks Like the Answer is No

According to this article in Forbes magazine, 17 out of the top 20 Internet retailers are brick and mortar operations that collect tax. Also, it is estimated that consumers paid sales tax on half of their online purchases this Christmas.

So maybe avoiding sales taxes isn’t the main lure of shopping online. Even though you wouldn’t be surprised people would try to avoid the tax which now averages more than 8.5% in the taxing states.

This estimate that half the sales taxes owed by consumers on the purchases of goods online are being collected anyway was made by William Fox, director of the Center for Business and Economic Research at the University of Tennessee. He bases that estimate on surveys of Web sites he and his students have conducted over the last two years.

“I was surprised to find it was so high. And if anything, it’s growing,” says Fox.

Only three of the 20 largest online merchants in 2006 were pure online operations, according to Internet Retailer’s annual rankings. Staples (nasdaq: SPLSnews people ), Office Depot (nyse: ODPnews people ), Sears Holdings (nasdaq: SHLDnews people ), Best Buy (nyse: BBYnews people ), J.C. Penney (nyse: JCPnews people ), Wal-Mart Stores (nyse: WMTnews people ), Circuit City (nyse: CCnews people ) and Target (nyse: TGTnews people ) all made the top 20. All collect sales tax. Limited Brand’s (nyse: LTDnews people ) Victoria’s Secret, which collects taxes, sold more online last year than did (nasdaq: OSTKnews people ), which only applies tax to shipments bound for Utah.

As the article in Forbes states, even non-traditional retailers have started moving into the tax line, too. Dell (nasdaq: DELLnews people ) began collecting sales tax nationwide last year, prompting some grumbling online by surprised shoppers. CDW (nasdaq: CDWCnews people ) began collecting in 2005.

Retailers are finding that customers like being able to return a defective DVD player purchased online to a local store.

We’ve blogged before about it being pretty well-settled that if you are a retailer that allows people to return items to a brick and mortar location, you have nexus — even if the online retailer and the brick/mortar one are in separate legal entities.

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