Tax-free Shopping - Tax-free Shopping in The United States

Tax-free Shopping in The United States

Some jurisdictions in the United States allow the refund of sales tax to foreign tourists upon exiting the country, e.g. Texas.

Tax-free shopping is a privilege enjoyed by all residents of United States jurisdictions without sales taxes, but through so-called "remote" sales—including sales to visiting out-of-state residents, sales via catalog, and sales via Internet—customers in a sales taxed jurisdiction may also make purchases in sales tax-free jurisdictions, notwithstanding the legal requirement to pay the equivalent (compensatory) use tax in their home state. Delaware is free of all sales taxes, excluding homes and cars (3% transfer tax for real estate, and a 2.75% tag fee for cars). For example, merchants in tax-free New Hampshire regularly advertise to residents of adjacent Massachusetts, Vermont and Maine the benefits of purchasing goods without sales tax, ignoring the fact that there is no general exemption from the use taxes when the goods are taken back home. Many purchasers are unaware of the obligation to pay the tax, or file the necessary return, or of the fact that it is not the duty of a merchant to collect it from them and pay it indirectly. However, it is the purchaser's obligation to pay it directly to the state, often in connection with filing their annual income tax return.

The liability of any non-exempt resident of a US state with a sales tax for payment of the equivalent use tax when purchasing goods from another state (or country) through mail-order, by telephone or through the Internet should not be confused with the issue of direct Internet taxes levied on Internet services themselves, such as bit taxes, bandwidth taxes, franchise taxes, and email taxes. Most such levies are banned until 2014 by the Internet Tax Freedom Act Amendment Acts of 2007 which extends the provisions in the federal Internet Tax Freedom Act beyond its original 2007 expiration.

Goods that would be taxable at home are taxable at the same rate when taken home or delivered, regardless of where or how they were purchased. Numerous local sales tax and use tax exemptions exist according to taxpayer status (for example, there exist exemptions for charitable organizations), exemptions based on size of purchase (e.g., clothing under $110 in Vermont), and exemptions for specific types of goods (e.g., protective clothing, food, medication, and educational materials).

Even customers from jurisdictions that levy sales taxes can in theory have additional tax liabilities when shopping in neighboring no-tax or lower-tax jurisdictions. For example, if an adjacent state has a slightly lower tax rate than the purchaser's home, that shopper could face an additional tax burden even though the purchase was already taxed at the point of sale. The difference in tax rates is referred to by collecting authorities as "tax discount".

Taxing jurisdictions generally extend an exemption from use tax to commercial taxpayers that purchase business stock. This type of exemption applies to goods purchased tax-free for resale, but lapses if the goods are converted to use by the company itself (for example, a company car, office supplies, and cleaning supplies).

Some countries charge a value added tax (VAT) or goods and services tax (GST) that extends to retail purchases. When those customers are residents of a US state having sales taxes on such goods, the VAT or GST taxes paid might be used as a credit against the amount of use tax otherwise owed, unless excluded, such as in Massachusetts. However, when a post-travel refund of the VAT or GST is claimed, the purchaser's home taxing jurisdiction can then assert a claim for the full sales tax liability.

Despite the fact that most shoppers are unaware of their use tax obligations, there are potentially severe penalties for willful tax evasion. Any online, telephone mail-order, or traveling shopper who makes "tax free" purchases could be successfully prosecuted for evading state use taxes if he or she willfully fails to file the necessary return and pay the required tax, or intentionally omits the information from a required annual return. When a taxing jurisdiction enforces use tax liability, it often also seeks additional penalties and interest accrued for failure to timely remit the necessary tax return and tax payments, as well as possible perjury for omissions on official forms filed. The statute of limitations on taxes due may not begin to run until and unless a required tax return is filed. Some states also provide a "safe harbor" scale of use tax that is most likely owed by every taxpayer, based upon the taxpayer's adjusted gross income. For example, someone with an income of over $100,000 could earmark 0.0005 of his or income as payment for "use tax", without having to account for any actual out-of-state purchases under $1,000 each.

To step up the opportunity for collection of use taxes, several US states have been working to implement a "streamlined" interstate use tax agreement. To effectuate this multilateral interstate compact, many states have enacted, or are considering enacting, statutory changes that require residents to disclose, under penalty of perjury, their annual use tax liability for out-of-state purchases. The focus on use tax collection has increased because the U.S. Supreme Court has placed significant hurdles in the path of state efforts to collect sales taxes on transactions in other no-tax or lower-tax jurisdictions. In National Bellas Hess, Inc. v. Department of Revenue of the State of Illinois and Quill Corp. v. North Dakota, the Court concluded that the Commerce Clause and Due Process Clause of the U.S. Constitution require that there be a nexus between the taxing state and the vendor of goods or services, in the form of a physical presence. This has been interpreted to apply to both catalog sales and out of state sales over the Internet. States are thus prohibited from collecting sales taxes on so-called remote transactions because to do so would unconstitutionally burden interstate commerce. The Streamlined sales tax project is the states' response, by which they are seeking to collect use taxes on remote Internet and catalog sales in lieu of sales taxes.

In connection with the Streamlined sales tax project there has been discussion among state tax officials of creating obligations or incentives for merchants to collect taxes from customers who are residents of sales tax states, especially in the area of online sales, in exchange for a remitting to the merchant a percentage of the taxes that would be otherwise unpaid. Some US states are also considering a tax amnesty, pursuant to which residents could settle unpaid use taxes and penalties at a discount, but only if the settlement is offered before collection of the tax liability commences.

The move to more widespread imposition of use tax liability on consumer transactions is not without opponents. Consumer advocates note that sales and use taxes are regressive, disproportionately hurting poorer families and individuals who are forced to spend most of their incomes. In addition, the Streamlined Sales Tax Project must track what consumers are buying online, a feature of the proposal that will inevitably lead to privacy concerns.