Buying goods over the Internet without paying sales tax is becoming a thing of the past.

States are insisting on online sales tax collections in order to make up for shortfalls in revenue due to the economic downturn. The latest to do so is New York, which passed a law in April requiring any Web retailer with partners in the state to collect sales taxes from customers in New York.

Many sites such as Amazon.com have affiliate sites that direct customers to the retailer for purchases of books and other items. These affiliates then receive a cut of the purchase price. Of course, many states have long required customers to pay taxes on Internet purchases by declaring them on their tax returns. But most people did not bother and only paid the tax if retailers added the charge to their bill. Now that New York has started to require sites to collect the taxes, even from out-of-state residents, other revenue-hungry states are sure to follow suit.

Amazon has challenged the New York law, filing a lawsuit last month to block it (see Amazon Sues New York over Sales Tax). Last Friday, another online retailer, Overstock.com, filed a lawsuit of its own. But on Sunday, as the law went into effect, Amazon began charging its New York customers the sales tax, as did other large Web retailers such as Newegg.com.

Overstock has still not begun charging its customers, claiming that it is not subject to the new law. The reason: Overstock ceased doing business with any of its affiliate sites in New York. But if Overstock loses its lawsuit, it could face a hefty tax bill from the state.

Consumers are sure to miss the attraction of tax-free shopping on the Web, though hopefully it will mean there will be fewer brick-and-mortar bookstores and music shops going out of business. Online shopping has become so thoroughly entrenched at this point that many Internet businesses don't need the extra enticement as much as they did when the e-tailing trend emerged over a decade ago.

But as tax-free shopping becomes a thing of the past in more states, Web retailers are going to need to put in more sophisticated sales-and-use tax software to calculate the charges for their customers in various jurisdictions. That could prove to be a boon for a different kind of vendor: the tax software developer.


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