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In light of the upcoming holiday shopping season – beginning with Black Friday and Cyber Monday – Indiana’s Department of Revenue (DOR) reminds consumers that online purchases are subject to sales and use taxes that one must report on their state tax returns.

 

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As the DOR points out:

  • Sales tax is paid on most items at retail stores. When one buys an item from a retailer, one will pay Indiana’s 7% sales tax on that purchase at the time of the purchase (though there are a few exceptions). The retailer collects the tax and sends it to the state.
  • One owes a use tax when purchasing something on the Internet but not paying sales tax on it. In addition, a Hoosier owes a use tax on purchases made while traveling outside of Indiana. This tax has been reported on and remitted with the state income tax return since 1969.


According to a 2014 Tax Foundation ranking, Indiana’s 7% state tax rate is the second highest in the nation, behind only California’s 7.5% rate. Mississippi, New Jersey, Rhode Island and Tennessee also have a 7% state tax rate.


Why states charge sales tax


The Tax Foundation explains that general sales taxes originated in the Great Depression era as an emergency measure, needed because of the collapse of property tax revenues. Mississippi was the first state to collect a sales tax in 1930. Today, only Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax.


Beyond state sales taxes, the Tax Foundation notes that local sales taxes exist in 38 states, resulting in almost 10,000 different sales tax jurisdictions. While Indiana only has one tax jurisdiction, other states have hundreds, or, thousands. California, for instance, has 231, Washington has 346, Missouri has 1,242, and Ohio has 96. For this reason, Indiana’s rank drops to #21 when taking into account the state and local tax rates.


Lost e-commerce related taxes


According to a November 2011 estimate by the Indiana Fiscal Policy Institute, the amount of lost e-commerce related sales taxes ranged from $39.6 million to $114.3 million for fiscal year 2012. That same year, HoosierAcces.com reported that Indiana had reached an agreement with the online retailer Amazon.com that allowed the state to start collecting sales taxes on Internet purchases starting on January 1, 2014, or 90 days from the enactment of federal legislation, whichever came first.


Indiana is not the only state suffering from this problem. A pre-Thanksgiving Cleveland Plain Dealer story revealed that “Ohio consumers will spend about $1 billion on Internet purchases from sites like Amazon.com that don't charge or collect sales tax,” which costs the state about $70 million in lost sales tax revenue.


No federal solution


HoosierAccess.com quoted Indiana’s then Governor Mitch Daniels as declaring that the “only complete answer to this problem is a federal solution that treats all retailers and all states the same. But for now, Amazon has helped us address the largest single piece of the shortfall, and we appreciate the company working with us to find a solution.”


In 2013, the Senate passed the federal Marketplace Fairness Act, S-743, but it went nowhere in the House. A House version sponsored by Arkansas Rep. Steve Womack in 2013, HR 648, also sits idle. And just last week, an Arkansas News article observed that while Representative Womack still backs the initiative, other prominent republican leaders do not, making it unlikely to proceed any time soon.

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