Let me preface my response by saying I am not an attorney and not in any way licensed or trained in giving tax advice, etc - however, I got my information from my accountant. As a musician, I travel a lot, and I also order a lot of things from the internet, and she is very good at making sure I do everything right. Here is my understanding of how this works:
Hey Dave, does that apply only to New York?
No, it applies to almost every state, and more accurately, it's a "use tax," not a sales tax, but it's the same thing, just a different name. Sales taxes are charged to merchants based on how much they sell (and there are different taxes based on what items they sell - food, for example, if often subject to a different sales tax rate than things like basses). States do this on purpose because they don't want people who can barely afford food to have to worry about sales tax, whereas people buying things like basses are not in the same situation. Many states don't have or have reduced taxes for things like caskets for the same reason.
Merchants pass along the cost of the sales tax to the consumer by simply adding it onto their price, although they can choose not to do this (in effect, giving you a discount on their price). For example, say your state's sales tax rate on basses is 7.35%. You buy a $1,000 bass from a local shop; your actual cost is $1073.50 with tax. You can negotiate with the store to eat the tax, in which case you pay $1,000 flat, but what really happened is you paid $931.53 for the bass and $68.47 in tax (the tax is less than the $73.50 above because the selling price was less and sales tax is a percentage of selling price). Merchants hold on to all the money they collect in taxes until it's time to pay their own taxes, and then they report their sales figures, and forward all the money they collected to their state's Department of Revenue.
Compare this to a a use tax, which is what the state charges when you buy something from a merchant who is outside your state's jurisdiction and not subject to your state's sales taxes (e.g. internet orders).
The use tax is generally the same rate as the sales tax, but instead of the merchant collecting this tax from you and paying it to the state, you are supposed to report it yourself (on your personal tax filing) and pay it directly. Failure to do this has the same penalties of cheating on your taxes in any other fashion.
However, it's nearly impossible to enforce, and here's why: Merchants are legally required to disclose their sales figures to the taxman, but out-of-state merchants are not required to disclose the *identity* of their customers to the gov't - to do so would be a breach of consumer privacy/confidentiality.
Since out-of-state merchants are not required to pay in-state sales taxes, it falls to the state to collect these taxes from the consumers themselves. But, without the identities of who bought what, they have no way of knowing how much you bought or how much use tax you're supposed to pay. They just count on you reporting it when you file your taxes.
It's a common misconception that there are "no taxes" when you order something online from out-of-state. Most people don't even know the use tax exists because it's impossible to enforce (but remember, ignorance of the law will not get you out of trouble if you get audited! It is your responsibility, as a taxpayer, to make sure you are paying the correct amount of tax, or you're in danger of getting fined or jailed.) The only way I can think of that a state's Department of Revenue could possibly know about internet purchases and enforce collection of the use tax would be if you admit to these purchases yourself, for example, in your tax filings, or on an internet forum
If memory serves, I believe that Delaware, New Hampshire, Montana, Alaska, and Oregon are the only states that don't have a use tax.
If an online (U.S.) merchant sells something to someone in their own state, they are required to pay a sales tax, just like any other merchant, and so they collect this tax from the consumer, just like any other merchant. Musician's Friend, for example, has a warehouse in Kansas City, Missouri, so when I order something from Musician's Friend's website (since I live in Missouri), they take care of figuring, collecting from me, processing, reporting, and passing along that tax to the state Dept of Revenue on my behalf.
If you want more info on your own state's use taxes, go to your state Department of Revenue website and search for "use tax," call your state's Department of Revenue and ask, or just ask your accountant.
