States crack down on tax-free online purchases

As annoying as it is to see sales tax tacked on to purchases, for some shoppers there is a silver lining. Sales tax can be deductible at tax time. At least this tax time — the measure allowing for the deduction on federal income tax returns expired and will have to be extended by Congress for future tax years.

But for this tax season, 2007 federal income tax filers still have the option of either claiming the amount of sales taxes they paid in 2007 or the amount of state and local income taxes paid, whichever is larger.

“However, most working taxpayers are going to be better off taking the deduction for their state and local income taxes,” says Meighan.  “That is, unless the taxpayer has purchased something of high value during the year, like a car, where the sales tax would have been significant,” he adds.

For taxpayers in states where the income tax is low but the sales tax is high, it will also be worth determining which would offer the bigger benefit. And obviously in those states where there is no state income tax but consumers do pay sales tax — such as Texas, Florida, Washington, Nevada, Wyoming and South Dakota — then being able to deduct sales tax is going to be highly beneficial. 

To do so, taxpayers can use the IRS-provided table which determines the deductible amount based on income levels. If major purchases were made during the year, such as a car or heirloom jewelry, these amounts may be added to the amount from the table, according to IRS instructions.

For those concerned the IRS might underestimate just how good a consumer they have been, an alternative calculation can be made.  But it requires a shopping bag full of 2007’s receipts, a calculator and a lot of time. 

When it comes down to it, as unfair as it is, making all retailers—online or otherwise—collect taxes may be the best option for taxpayers, regardless of how overtaxed they already are. Having to account for the prior financial year is hard enough at tax time without having to calculate and report the amount of taxes that were never paid in the first place, even if that amount is deductible.

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