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Don't Pay Sales Tax!

You may not pay much attention to sales tax, especially on low-priced items. But most state governments depend on sales tax revenues, and many of them are suffering from the popularity of Internet and catalog-based shopping.

No tax?
At first glance, sales taxes seem like an easy mechanism for governments to collect revenue. When you go shopping on vacation, retailers don't care where you're from; they just charge the appropriate tax for the store's location. Then they pay the taxes they collect to the state.

You'd think that ordering from a catalog or the Internet would work the same way, but it doesn't. The reasons are complicated, but they boil down to the fact that the tax laws put an inordinate amount of value on physical presence. So if I live in Massachusetts and buy something from a mail-order store located in Vermont, Vermont can't charge me sales tax, because I'm not there. Similarly, Massachusetts can't collect sales tax from the store because it's in Vermont.

Technically, if you bring something home that you didn't pay sales tax for, you're supposed to pay your home state anyway. States with sales taxes also have something called use tax, which plugs this hole. The problem is that while it's easy for governments to make retailers collect sales taxes, it's almost impossible for them to go after the vast majority of individuals who never pay their use tax liabilities.

The well-known moratorium on Internet taxation, which is up for renewal on Nov. 1, doesn't deal directly with retail sales, focusing instead on the money users pay to access the Internet. But a number of proposals are aimed at imposing sales taxes on all Internet sales, regardless of where the buyer and seller are. Although a Supreme Court decision opened the door for Congress to take action allowing this, Congress hasn't done anything so far.

Staggering figures
When you consider the amount at stake, it's no wonder that states are drooling. Amazon (Nasdaq: AMZN  ) , for instance, had gross revenue of more than $12 billion in the past year, which could translate to several hundred million dollars in sales tax revenue. Millions in big-ticket jewelry purchases at Blue Nile (Nasdaq: NILE  ) go untaxed outside of the company's home state of Washington. Billions of dollars in auctions on eBay (Nasdaq: EBAY  ) go on every year, much of which could potentially be taxed. And while retailers with actual bricks-and-mortar stores, like Barnes & Noble (NYSE: BKS  ) , charge tax in their stores, some of their Internet sales still go without consumers paying any tax.

By now, Internet selling is so convenient that online retailers would likely survive even with a sales tax. But for big-ticket items like furniture and electronics, not having to charge sales tax is a huge competitive advantage over traditional stores. Think about it: If you could save $100 or more just by making a phone call, you'd jump at the chance. Even if you had to pay some shipping costs, you'd still often end up ahead.

For now, Internet and mail-order sales will continue to be sales tax-free in many cases. Just remember that unless you live in a tax-free state, you're probably a use-tax scofflaw, and don't be surprised when the bargain disappears. It's probably just a matter of time before sales-tax savings become history.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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