Do you own a company or are interested in starting a company selling products or services over the Internet? It is extremely important to understand the laws pertaining to the collection of sales taxes.
If you run a business with a physical “bricks and mortar” store, collecting sales tax is relatively straightforward. You charge your customers the sales tax required by the jurisdiction where your business is located. For example, if you operate a retail store in Pittsburgh, Pennsylvania, you would collect both state and local sales taxes from customers buying merchandise at your store.
But suppose you start selling your products online. Does that mean you charge customers the same sales taxes that you do to those who are coming into your store? It depends.
If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. If you do not have a presence in a particular state, you are not required to collect sales taxes.
In legal terms, this physical presence is known as a “nexus.” Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain whether or not your business qualifies as a physical presence, contact your attorney, tax adviser or state’s revenue agency. If you don’t have a physical presence in a state, you’re not required to collect sales taxes from customers in that state. (However, there are some states that define physical presence to include affiliated entities.)
This rule is based on a 1992 Supreme Court ruling (Quill v. North Dakota, 504 U.S. 298) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with more than 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce.
Keep in mind that not every state and locality has a sales tax and laws of each state are still evolving. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing. And many have “sales tax holidays” for a few days a year on items like clothing, school supplies and energy star products.
If you are charging sales tax, you need be familiar with applicable rates. You may also have “use tax” requirements (see right-hand box for more information).
The Amazon Tax
For years, Amazon.com has been criticized for collecting sales taxes from customers in only a handful of U.S. states. Recently, it also began collecting sales tax from residents of California, Texas and Pennsylvania as a result of laws passed there.
Several other states have recently passed or are considering “Amazon tax” laws designed to compel Amazon to collect state and local sales and use taxes from customers. (There is no federal sales tax in the United States.)
Proponents argue that Amazon gains a competitive edge over brick-and-mortar retailers in states where it does not collect sales tax. Amazon is under increasing legal and political pressure from state governments, traditional retailers and other groups because it doesn’t collect sales tax in many states with a statewide sales tax. This includes several states where Amazon has a physical presence via distribution centers and wholly owned subsidiaries.
The law continues to develop in this area. Almost all states have legislation or pending legislation that deals with the collection of sales taxes over the internet. Furthermore, several bills have been introduced in Congress that have attempted to address these issues on a federal level. This matter is likely to be revisited by our nation’s lawmakers.
Determining which sales taxes to charge can be a challenge. Many online retailers use online shopping cart software services to handle sales transactions. These services are programmed to calculate sales tax rates for retailers. It’s important to understand the complex calculations involved so that your business is in compliance with sales tax reporting and payments. Consult with your attorney and tax adviser about your responsibilities to collect sales and use taxes as an Internet-based company.
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|Sales Tax versus Use Tax|
|States with a sales tax generally have a companion tax for purchases made outside the state.
If you have purchased items for use in one state from retailers that do not collect sales tax for that state, you generally owe “use tax” on those items. Residents in certain states are responsible for paying use tax on their out-of-state purchases.
Use tax is an important source of revenue for many states — especially since more people are buying goods over the Internet, from mail order catalogs through toll-free numbers, and from out-of-state locations. If a state tax department receives information about purchases in which use tax was owed but not paid, it assesses purchasers for the tax, as well as potential penalties and interest for late payment.
In some states, retailers are required to notify customers if use tax is due and inform them that they must file use tax returns. Some states require use tax collection from out-of-state retailers that have no physical presence in the state but sell to its residents. In addition, states have subpoenaed customer lists from retailers in their efforts to collect use tax from customers who fail to pay. Consult with your attorney and tax adviser about your responsibilities.