Thanksgiving is right around the corner and that means that two of the most popular shopping days of the year, Black Friday and Cyber Monday, are almost upon us. For the past week, people all across America have been ripping through sale circulars and scouring the internet to find the very best deals out there. However, despite their immense amounts of research and meticulous calculations, most shoppers neglect to consider the taxes that will be assessed on their purchases. Depending on the nature and location of the purchase, shoppers will either be required to pay sales tax or use tax.
Sales taxes are taxes imposed by state and local governments on sales that take place within their jurisdictions. When a shopper makes a purchase in a store, they are required to pay a percentage of the purchase price in sales tax. The store collects the tax on behalf of the government and later remits it with its sales tax return which is filed annually, quarterly, or monthly depending on the store’s sales volume. In New York State, the average sales tax rate is approximately 8.5%. For individuals planning to do a great deal of shopping on Black Friday, sales tax has the potential to really add up.
“Well if that’s the case then I’ll just go shopping online on Cyber Monday and not have to pay any tax, right?”
Not quite. Most online purchases are subject to either sales tax or a similar tax known as use tax. The type of tax paid is dependent on whether or not the seller has what is called “nexus” in the state where the purchaser resides. Generally, nexus is determined by a seller’s physical presence in a state; a seller with an office, warehouse, or a server in a state will be considered to have nexus there. If a seller has nexus in a state, it is required to collect and remit sales taxes to that state. This is the reason why Amazon charges sales tax at checkout. Amazon is one of the largest online retailers and has warehouses and fulfillment centers throughout the country. As a result, it has nexus is many states and is required to collect and remit sales taxes to those states.
If a purchaser makes a taxable purchase online and the seller does not have nexus in the purchaser’s home state, they will be required to pay a use tax. Use taxes are different from sales taxes in that they are not collected at the time of the sale. Instead, they are collected when and where the item is used, hence, “use” tax. It is the responsibility of the purchaser to keep track of all out of state purchases made during the year, report them to the appropriate local and state governments, and pay the tax. Reporting of use tax is done on the individual’s state tax return and the tax is paid with the individual’s state income taxes. For individuals with a large amount of out of state purchases, their end of the year use tax liabilities can become quite high.
“So is there really a benefit to shopping online on Cyber Monday?”
Unfortunately, from a tax standpoint, there is not. Whether purchasers buy online or in store, they are responsible for paying tax on their purchases. The true appeal to shopping online on Cyber Monday, as opposed to Black Friday, is the fact that there are no lines, no screaming, and no dress code. Be safe and don’t forget to include sales taxes in your budget whether you go on your shopping spree online or in-store.
Jacob Lutz, CPA
Jacob joined Cerini & Associates in January of 2013 and has been actively providing tax, compliance, and business advisory services to a wide variety of both for-profit and non-profit clients.