According to the U.S. Census Bureau, 33 percent of state revenues come from sales tax. And each year, state and local governments lose billions of dollars of potential revenue due to uncollected tax on online sales a figure that the Center for Business and Economic Research says could add up to as much as $33.8 billion by 2008. No wonder states are cracking down on online businesses that don't collect and submit sales tax and angling for new federal guidelines that would simplify and standardize sales tax rates and collection.
Determining whether or not your online business needs to be collecting sales tax from customers can be tricky, however, and the information available online can be intimidating and confusing. (For example, those of you saying, "Hey, what about the Internet Tax Freedom Act?" According to the Act, Internet access charges cannot be taxed, not merchandise sold online to customers in states where you have a physical presence.)
To sort out the facts from the fiction, Ecommerce-Guide.com scoured the Web and spoke with the experts. What we discovered could not only potentially save you thousands of dollars in back taxes, interest and penalties, but keep you out of jail.
Does your online business need to pay sales tax?
The primary determinant of whether or not you need to collect and pay sales tax is if you have a physical presence in the customer's state. Sounds simple enough, right? Wrong. Determining whether you have a physical presence, or a level of activity that would require you to collect and remit sales tax, what taxing
bodies refer to as "nexus," can vary from state to state. It may be owning or renting property in that state, having a warehouse or a fulfillment house that maintains inventory for you in that state, having employees in that state or promoting your business in that state through something like a trade show.
For example, let's say Sue Jones, who lives in Massachusetts, has an eBay store. She runs everything out of her house. She maintains all of her own inventory and doesn't go to or sell at trade shows. Sue only needs to collect sales tax from customers in Massachusetts. However, if Sue's business expands and she decides to use a warehouse or fulfillment service in Ohio, now she is obligated to collect and pay Ohio sales tax when selling to customers in Ohio.
To learn more about nexus and what your state's guidelines are for determining it, do an online search with the name of your state and the words sales tax and you should be directed to your state's Department of Revenue Services. You can also visit the Helpful Information page on the Sales Tax Institute's Web site. Under "Sales Tax News and Tips" you can click on the topic called "Nexus."
Once you determine nexus, you need to figure out which items in your inventory are subject to sales tax in those states you have nexus in, explains Richard Stim, a Nolo editor, small business attorney and entrepreneur who writes about Internet sales tax. Again, your state's revenue services/tax-related Web site or the Sales Tax Institute should be able to provide you with this information.