Things you never knew were taxable

When you order something online, does the retailer charge you sales tax? Do you pay attention to that?

I haven't always.

Online purchases and sales tax

After we became Amazon Prime users, our online internet orders went waaaaaay up. That free shipping will getcha every time. That year, my husband and I sat in our CPA's office, as oblivious to most tax things as, unfortunately, every other year.

“So,” said Paul, the CPA, “have you made any online purchases?”

“Yes,” I said, confidently.

“How much?”

“Um … a lot?” I said, much less confidently.

Paying online sales tax reminds me of a quagmire.

It's confusing. It's murky. But it's the law in most states.

So, here's the lowdown:

If the merchant has a store in your state, the merchant will collect the sales tax, even if your order was shipped from out of state. That's easy. Nothing for you to do, except pay it already.

In a fairly recent change, the online retailing behemoth (also known as Amazon) collects sales tax if an Amazon order is shipped to these 26 states — whether or not there is a physical store present in that state:

ArizonaIndianaMinnesotaOhioWest Virginia
CaliforniaKansasNevadaPennsylvaniaWisconsin
ConnecticutKentuckyNew JerseyTennessee 
FloridaMarylandNew YorkTexas 
GeorgiaMassachusettsNorth CarolinaVirginia 
IllinoisMichiganNorth DakotaWashington 

For some of the states on this list, that's a new law. Take Illinois, for example. Earlier this year — after an Illinois Supreme Court battle — Amazon is now charging sales tax on all orders shipped to Illinois. Again, you don't have to keep track of your Amazon orders — for sales tax reasons, anyway.

But that's not all.

In five states where sales tax is NOT charged on Amazon purchases, Amazon is still required to report your online purchases. The Colorado law is currently under legal challenge — but Oklahoma, South Carolina, South Dakota and Vermont still require reporting.

Sales tax vs. use tax

And here is another scenario:

If you buy, for instance, a boat in a state that does not have a sales tax, but you bring the item into a state that does have a sales tax, you're responsible for submitting the sales tax on this item. Only now it's called a use tax, a tax that refers to physical goods that are consumed, stored, or used within a state.

The question is: How can you be a law-abiding citizen if online retailers don't charge you sales tax, but your state requires you to pay the sales tax?

I want to be a law-abiding citizen; but after our meeting with our CPA, I realized my methods were lacking.

So here is my simple system:

I created a folder in Gmail cleverly called “Internet orders I didn't pay tax on.” Every time I order something that I didn't pay tax on, I move the order to this folder.

If you're more of a paper person, print off the order and save it in a folder (kind of like our editor's filing system she talked about recently).

No matter which method you use, when it's tax time, review your items and pay the sales tax if required.

Are insurance benefits taxable?

Your purchases aren't the only things that may have a surprise tax tag.

If you die, will your beneficiaries have to pay taxes on your life insurance?

Probably not, but it depends on state law and a couple of other factors. And also, if interest is generated, the principal is most likely not taxable, but the interest is.

With disability insurance benefits, paying tax depends on whether you paid the premiums with pre-tax or after-tax dollars. If you paid the premiums with pre-tax dollars, you're likely to pay taxes on your benefits.

What isn't taxable

With all this talk about what is taxable, I thought it would be fun to throw in something that you can enjoy without worrying about a big tax bite.

Credit card rewards are viewed as a discount, not income. Therefore, spend (wisely!) or save your credit card rewards without worrying about tracking them.

Death and taxes are certain

Although tax law is complicated, it is (somewhat) simplified by remembering that you should not be paying taxes twice on the same income/product. So if sales tax has already been collected, you should not be paying sales tax again.

If you've paid for your life insurance premium with after-tax dollars, your beneficiary should not pay tax — unless interest has been generated and no one has paid taxes on that.

Keep track of your online/out-of-state purchases for the year. And if you do happen to receive any insurance payouts, whether you're a beneficiary or if you receive disability insurance payouts for yourself, save about a third of this money and consult with a tax professional at tax time. After all, if you do owe taxes on this money, you don't want to scramble to find the funds to pay your tax bill. And if you don't owe? I'm sure you can find another account to fatten up.

As I mentioned, the tax code is confusing. What isn't confusing is that you won't get a free lunch (or a pass on paying taxes). Eventually, taxes will catch up to you.

What else is (or isn't) taxable that surprised you? Tell us about it in the comments!

More about...Taxes

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Beth
Beth
4 years ago

What surprises me is how convoluted your tax system is. it’s pretty simple to order things online here in Canada — you pay HST based on where you live (shipping address), not where the retailer is. (Within Canada, that is. If you’re ordering from the U.S. there’s a whole lot of hurt that makes up for saving the HST!) The only province that doesn’t have sales tax is Alberta. So if I’m ordering a gift for someone in Alberta, I can save the sales tax portion of the HST if I ship it directly from the retailer. Okay, so maybe… Read more »

a
a
4 years ago
Reply to  Beth

In Massaschusetts we pay sales tax on used cars as well, I bought a used car for cheap from a cousin and had to pay the tax based on what the price should have been. Which ended up being almost the same as what I actually paid for the car.

Jo-Pete
Jo-Pete
4 years ago
Reply to  Beth

If the US really wants to get serious about collecting sales tax, we’re going to have to standardize the system somehow. Right now, every state, county, or municipality can have its own unique rules about what is taxed or by how much. For a while, the state of Washington had an extra tax on candy, but because the law had to define what “candy” meant, the results were very strange – kit-kats and malted milk balls are not candy, but jelly beans and some energy bars are. It is completely unreasonable for a store in New Jersey that happens to… Read more »

Gwen
Gwen
4 years ago
Reply to  Beth

Most Canadian provinces do have a similar system where you have to self-assess any taxes for goods and services you purchase or lease for your business where they weren’t charged originally. It’s called a landing cost.

For example: My MB company has a service agreement with a tech company in TO. The TO company invoices us for the cost plus GST, but then I have to self-assess and remit PST provincially anyway.

Anna
Anna
4 years ago
Reply to  Beth

A close family member can gift you a car in Ontario, Canada (not sure about the other provinces) and then you won’t have to pay tax. Obviously, if you sell a car for a dollar, you’re only doing that to try to eliminate paying the tax which is why you have to pay tax on the wholesale value of the vehicle.

My Factoring Network
My Factoring Network
4 years ago

Interesting post!!! There are many things which we ignore but we are paying taxes indirectly. This post clears about taxes and other implications about what should be the taxes be. Thanks fr sharing.

Martha
Martha
4 years ago

Sweepstake winnings are taxed.
I just won a bike – or rather a gift card for a bike – from AAA. (I didn’t know people really won those things!)
But, I have to pay the tax out of my own pocket. Hum…

Overstappen
Overstappen
4 years ago

i was waiting for what isn’t taxable, it’s a smaller list so you know what is taxable

M
M
4 years ago

You stated that if you are in one of the states in which Amazon collects sales tax, you don’t have to keep track of your Amazon orders for sales tax purposes. However, this is slightly misleading. In my state, Amazon only charges sales tax on items you order that are sold directly by Amazon, not on items that come from third party vendors. As an example, if you placed an order of 5 items, and three are sold by Amazon LLC, and the other two are sold by ABC Toys, you were likely not charged sales tax on the two… Read more »

Lisa Aberle
Lisa Aberle
4 years ago
Reply to  M

You’re absolutely right!Thanks for chiming in.
Here is a link with more info, if anyone else is interested: https://www.amazon.com/gp/help/customer/display.html/ref=hp_left_v4_sib?ie=UTF8&nodeId=201133310

Katelyn
Katelyn
4 years ago

Very interesting article. I’m surprised I haven’t heard anything about having to keep track of online purchases for sales tax purposes. So if we realize that we weren’t charged sales tax on an online purchase, but should have been, how do we go about reconciling this? From the CPA scenario it sounds like this happens at tax time? Do we need to file a special form? And what do we do about previous years? Just let them go and hope we don’t get audited?

JoeM
JoeM
4 years ago
Reply to  Katelyn

Amazon in Michigan just started collecting sales tax a few weeks ago. In previous years, e-filing my taxes for the State of MI, it would specifically ask if you made online purchases during the year. I can’t remember if it was a line by line item or just enter a bulk amount and a description of the purchases. Either way, it added on the state 6% to whatever number you entered to your taxes. It’s highly unlikely the state has the resources to investigate the $10-100 in sales tax you avoided through online sales in previous years. There’s too many… Read more »

Nathan
Nathan
4 years ago

I never would have really thought about it. I very much bought all the things online as it is more convenient than running into stores when it can be deliver to you on your doorstep. But what I am more interested in is about income tax from online trading. I recently traded online for months now and started a modest amount ($100) and now I am earning roughly about $5000 monthly. My broker Eclipse-Finance.com is an offshore broker (london based). Had my account managed from Top-binary-signals.com which has 50/50 profit sharing (german based company). My question is how much tax… Read more »

Leslie Van Zee
Leslie Van Zee
4 years ago

Here’s another one: Gifts you receive from your employer can be taxable. For example, if you are recognized for an internal award with a gift card, that is actually part of your reportable income, and therefore subject to income tax. Luckily there is a “de minimis” exception, so you don’t have to worry about small things like donuts or birthday cakes.

Rick
Rick
4 years ago

If they only spent the same effort to spend taxes wisely as they do to collect them the country would be far better off.

Benny
Benny
4 years ago

What about out-of-pocket medical expenses paid with after tax monies? I read somewhere that if you paid over 10% of medical and dental expenses of your annual gross income you could claim the overage of that on your tax return. Please advise

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