Cybersense — In Cyberspace, Calculating Taxes Is Imperfect Science


Many people shop on the Internet to avoid paying the tax they owe on their purchases.

But some online shoppers end up paying taxes that don’t even exist.


So was Joe, a friend of mine who bought a pair of reconditioned Compaq computers through an auction on the company’s Web site. When he questioned the amount of sales tax he was charged, he learned he’d been victimized by a hidden accounting problem that may be costing online shoppers tens of thousands of dollars a year.

Joe’s winning bid for a pair of budget PCs was $622, and he agreed to pay $86 to have them delivered to his home near Tucson, Ariz. When the bill arrived via e-mail, he learned he also would be charged $49.56 in tax 7 percent of the cost of both the computers and the shipping.

Tucson stores collect 7 percent sales tax, including 2 percent that’s sent to the city and 5 percent that goes to the state. But outside the city’s limits, where Joe lives, only the state’s sales tax applies.

So why is Compaq collecting tax on behalf of some city where its customer doesn’t live? Because a computer said so.

Compaq’s billing system, like those of other online retailers, uses zip codes to track the tax rates that apply to Internet sales. But some zip codes are split by two or more taxing jurisdictions, and others are close enough to a city’s borders to confuse the caffeine-addled coders who write tax software.

Overtaxed in Tucson

Varying laws also make it inappropriate to apply the same rules to different states. Arizona, for instance, does not tax delivery fees. But Compaq’s billing software taxes them anyway, presumably because the fees are taxable elsewhere.

Such problems are one reason many online stores don’t collect sales tax at all. Sellers aren’t required to remit sales tax to states where they don’t maintain a store, a server or some other physical presence.

My friend’s experience suggests that Web retailers who do try to collect sales tax shouldn’t assume they’re getting it right. Though there’s no way to prove how many online shoppers are taxed incorrectly, I’d guess Joe has plenty of company.

Indeed, Tucson residents are among those most frequently victimized. Every remote Web site that collects a 7 percent tax from the city’s shoppers is essentially ripping them off.

Why? The reason is complicated, which is exactly why companies like Compaq are screwing it up.

Whenever you buy something from a remote seller, your local sales taxes don’t apply. Instead, you usually owe a “use tax” equivalent to the sales tax that would have been charged if your purchase was local.

Since most governments don’t make much effort to collect use taxes from their citizens, many people think their online shopping is tax-free. Retailers like Compaq that do charge local sales tax on remote sales are actually collecting that use tax.

Tucson, though, is one of a small number of cities, counties and states without a use tax. When its residents buy something from a remote vendor, the city has no legal claim to the 2 percent surcharge imposed on local purchases.

Whither reality?

Still, Compaq insists on collecting this nonexistent tax. A few times a year, the company sends the city’s finance department a check for a couple hundred dollars collected from online customers with a Tucson address.

“We’ve talked to them and told them we don’t have a use tax so they should stop sending us money,” said Richard Putz, a city revenue administrator. “They say they can’t change their software to accommodate us so they’re just going to send us the money.”

So my friend’s problem can now be summarized thus: He’s been charged a tax that doesn’t exist on a service that isn’t taxable from a city where he doesn’t even live. Forget taxation without representation; this is taxation without reality.

How common is his problem? Compaq spokesman Arch Currid said his company relies on the online industry’s most popular billing software to collect taxes from customers.

“There are zillions of different taxes and guidelines this company has to adhere to,” he said. So if they’re screwing it up, he said, there’s something else you should consider:

“This isn’t isolated to Compaq.”

To contact syndicated columnist Joe Salkowski, you can e-mail him at [email protected] or write to him c/o Tribune Media Services Inc., 435 N. Michigan Ave., Suite 1400, Chicago, Ill., 60611.

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