Internet Transactions Are NOT Tax Free:
The most important thing to understand about internet transactions is that they are NOT tax free. While many still believe the Internet Tax Freedom Act (ITFA) of 1989 exempted online business from taxation, the purpose of the ITFA was strictly to exempt certain internet access services. It never referred to the sale of goods over the internet. So while some internet transactions may be exempt from tax in certain situations, it is NOT due to the ITFA.
The internet is, for sales tax purposes, in essence a virtual catalog. And the principles handed down from U.S. Supreme Court cases such as Quill (referenced in the "Commerce Clause, Due Process & Quill Corp" section), are applicable to sales over the internet. If the seller has nexus in the state to which the order is to be shipped, the seller should collect and remit those taxes. If tax is not charged to the purchaser (presumably because the seller does not have nexus), then the purchaser must remit the requisite use tax to the state.
Note: For sales to consumers, where no tax is charged, many states (including New York and California) have provided a line on their individual income tax returns asking individual consumers to remit any tax on items purchased online.
Some sales over the internet might not be taxable if the sale is exempt for other reasons. An example is certain types of software, in certain states. (The states are not uniform in their treatment of software transmitted over the Internet.) In some states the electronic transmission of software to a purchaser is exempt from sales tax. However, in others, such as Texas, the sale of canned software transmitted over the internet is still taxable.
Why It's Important: Some people mistakenly believe that the Internet Tax Freedom Act provides freedom from sales taxation on items sold over the internet. As mentioned above, the internet is akin to a catalog. Sellers of items via the internet must collect and remit applicable sales tax if the seller has nexus in the state of the destination of the sale. If the seller does not have nexus, the seller is not yet required to collect and remit the tax - although the purchaser will still be responsible for that tax - in the form of use tax.
Internet Taxation Changes & Marketplace Fairness Act:
Recently there has been significant mainstream media discussion about "the new internet tax". There is really no new tax. What the media is referring to is the recent flurry to pass federal legislation referred to as the Marketplace Fairness Act ("MFA"). The MFA has been proposed in various shapes and sizes for the past several years by various members of the US Congress to require sellers to collect sales tax even if they do not have physical presence (nexus) in the state. (You know from reading about Quill, above, that currently, a company must have nexus to be required to collect and remit tax.) In 2013, the legislation progressed, with the Senate passing the measure in spring. However, it is currently stalled in the House of Representatives. Essentially such legislation (in its various forms) would require all sellers making sales in excess of a fairly low threshold (currently $1 million) to collect and remit tax on sales to any state.
Why It's Important: Depending upon who you ask, such proposed legislation either levels the playing field between internet retailers and "brick & mortar" stores, or it unfairly burdens small internet retailers who otherwise don't have any physical connection or presence in a state. While there is no crystal ball, it is likely that Congress will, at some point, pass some type of legislation to address these issues. The question, 20+ years after Quill, is when?
See Sylvia Dion's "Internet/E-Commerce blog for more detailed information regarding the Marketplace Fairness Act/MFA.
Streamlined Sales Tax (SST):
Since 2000, numerous states have banded together in the hopes of simplifying sales/tax schemes in an effort to ease the burden of compliance for taxpayers. The goal, ultimately of the SST is to ask the U.S. Congress to overturn the Quill decision (discussed above), that requires companies to have nexus in a state before imposing a collecting and remitting responsibility. The states argue that they are losing revenues as commerce transacts over the internet because companies can still shield themselves from having to collect taxes if they don't have nexus, and consumers are likely not remitting the use tax directly to the state.
As of 2013, still less than half of the states have become Full Member states and are in some level of conformity - and three (3) are Associate Member states. Unfortunately, for SST, some of the largest states in the union including California, Texas and New York, to name a few, are not yet (nor may they ever be) in conformity.
Why It's Important: For many years, "nexus" has been the defining standard as to whether a company must collect and remit sales/use tax. If Congress overturns the Quill decision by enacting legislation which would not require such a standard, all companies would have to begin collecting and remitting the appropriate sales tax on sales in interstate commerce. (This is essentially the goal of the MFA discussed above.) The SSTP has been instrumental in bringing such legislation to the forefront year after year.
See the comprehensive Streamlined Sales Tax (SST) section for detailed information regarding the SSTP.
Don't forget to check the following Sales Tax 101 sections to learn more about sales tax: