Tax Collecting for Online Sales
Businesses are effectively tax collectors when it comes to sales tax. The tax is not levied on the business, but rather on the customer. But it is the obligation of businesses to collect the tax and remit it to the state -- or face penalties for not doing so. With more than 8,000 state and local sales tax jurisdictions, this obligation can seem overwhelming. Here are common myths surrounding sales tax collections.
Myth #1: Sales tax depends only on the location of the buyer.
Reality: Sales tax collection is based on whether a seller has a physical presence within a state. Usually, this means having an office, store, factory or other facility. But physical presence can also result when a business sends a sales force into a state or otherwise has a "nexus" or contact with that state.
Once a business determines which state or states it has a physical presence in, then it must collect sales tax for sales to customers within each state.
However, five states -- Alaska, Delaware, Montana, New Hampshire, and Oregon --do not have sales tax. And even when a business is subject to sales tax collection rules, many items may be exempt from tax. For example, there may be no sales tax on clothing in a particular location. You need to check with the state tax or revenue department to find out what is or is not exempted.
Myth #2: The Internet Tax Freedom Act means businesses that conduct only online sales are exempt from collecting sales tax.
Reality: This federal law generally bars states from imposing sales tax on Internet access fees (e.g., AOL service). It does not stop states from collecting sales tax on e-commerce. And states that had imposed sales tax prior to this moratorium are allowed to continue their tax on access fees.
This temporary moratorium on sales tax runs only to November 1, 2007, unless Congress takes action (there is a bill currently pending to make permanent the moratorium on sales tax on Internet access).
Myth #3: The Streamlined Sales and Use Tax Agreement requires businesses with online sales to collect tax in every state.
Reality: This agreement, which went into effect on October 1, 2005, is an effort by states to establish uniformity and simplicity in sales tax as a way to increase their revenues. According to Jeffrey Rhines, a certified public accountant who serves on the Board of Directors of the Business Advisory Council to the Streamlined Sales Governing Board, there have already been significant changes at the state level that make dealing with sales taxes easier for business. For example, the member states now have a standardized exemption form that businesses can use when selling to non-profit organizations claiming exemption from sales tax.
The agreement currently has 14 full members: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South Dakota, Utah and West Virginia. Compliance means that state law has been changed to reflect standardized definitions (e.g., what is "food") and other terms of the accord.
Many other states are associate states -- they comply with some provisions of the agreement. And others, such as California and New York, are advisory states, providing input on the agreement but not necessarily conforming their state law to it.
(NOTE: The agreement does not change the previously stated underlying rule that a business needs a physical presence in a state to become obligated to collect tax for sales in that state. The agreement does not dictate what states can tax.)
Myth #4: Businesses that voluntarily collect sales tax in states in which they are not clearly obligated to collect are exposing themselves to tax audits.
Reality: Businesses that operate in member states of the Streamlined Sales and Use Tax Agreement can insulate themselves from sales tax audits as well as simplify their collection responsibilities by working with a certified service provider (CPS). These are companies authorized by states to act as collection agents in much the same way as ADP and PayChek handle employment taxes for businesses. The CSP provides technology-based assistance to ensure that a business properly collects sales tax, receives the tax from the business and then turns the funds over to the states. There is no cost to businesses for using a CSP (the CSP is paid by the state) and businesses that opt to use a CSP are protected from state audits (the state can proceed only against the CSP).
BARBARA WELTMAN is an attorney and a trusted professional advocate for small businesses and entrepreneurs. She is the author with such titles as J.K. Lasser’s Small Business Taxes and Smooth Failing, and she contributes regularly to American Express OPEN and SBA.gov. Her articles have appeared in the Wall Street Journal and U.S. News and World Report. Weltman is also the publisher of Idea of the Day and monthly e-newsletter Big Ideas for Small Business at www.barbaraweltman.com and hosts radio shows and podcasts, including Build Your Business radio. She has been named one of the 100 Small Business Influencers in the U.S. for the third year in a row.
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