This is a guest post by Shauna Wortinger, a Certified Public Accountant who specializes in small and growing businesses. Visit her website by clicking here.
E-commerce has become a multi-billion dollar industry. More businesses are reaching their customers through social media and mobile devices. Even businesses that have been around for years are finding that they need to have an Internet presence to reach their existing and new customers.
More money is being exchanged through purchases done on the Internet. The problem the individual states are having with this explosive growth on the Internet is the lost sales tax revenue that was previously collected in the ‘brick and mortar’ retail stores.
If you are collecting money on your website, there are several questions you should know the answer to. If you do not know the correct answer for your industry or specific situation, please seek professional advice as these are not definitive answers. Sales tax is a state issue. There are 50 states and 50 different state laws, therefore the laws could be different in your specific scenario.
Should you collect sales tax for the products you sell on your website?
In general, if your product is downloadable (for example, software) or labor services you provide to your customer it is not subject to sales tax. However if it is a tangible product you touch and ship out in the mail, then you generally need to charge sales tax. I say ‘generally need to charge sales tax’ because it depends on your particular state laws as some states will require that you charge for a downloaded e-book.
What is considered your business location?
You may see the word ‘nexus’ referred to in some state laws. Nexus means you have physical presence in that state. For example, you have an administrative office, 3rd party shipping warehouse, or employee located within the state borders. Even if you temporarily do business for a limited time, like a trade show or you travel for sales meetings frequently enough to be considered to have a ‘presence’ in that state. Since your business has a presence within that state you are to apply to have a sales tax permit, collect, and remit sales tax according to that states’ laws, even though you made the sale through your website.
Amazon, one of the largest e-commerce businesses, has recently been charging sales tax on their shipments. The reason why is because of their growth, they have opened more warehouse distribution centers. Since they have a ‘nexus’ or presence in 27 different states, they are collecting sales tax on consumers who live in those states, even though the consumer has bought the product online.
What if I ship in-state?
The general rule about sales tax is that you are to collect sales tax where your business is located (see above). Some states have laws that if you ‘drop-ship’ within the state where you are located you collect the sales tax where your shipment is going.
What if I ship out-of-state?
Outside of the state border of where you are located the laws get difficult to enforce. To require a small e-commerce business to collect in all 50 states they ship to would be administratively burdensome. You can imagine selling a T-shirt for $25 to someone in Oklahoma and that is the first and only time you have sold and shipped to that state. Do you have to file for a sales tax permit, collect the 8.5% sales tax (which amounts to $2.13) and then submit the state return in order to pay $2.13? Currently, no, but the laws may be changing. There are discussions to have the federal government step in to help the states collect more money from consumers by enforcing the Marketplace Fairness Act of 2013. It is not currently law, but is making headway to be the new norm for e-commerce and state sales tax.
If you are interested you can read more about the proposed law here: http://marketplacefairness.org/what-is-the-marketplace-fairness-act/
Tax laws are always changing as business and government find the balance in the marketplace. What many states have currently done to offset the lost revenue from e-commerce sales, is adopted a ‘use tax’ law. Use tax is very similar to sales tax as it is calculated with the same percentage (%). When you buy online and the business does not charge you sales tax, you are to report that purchase to the state you are in and pay the appropriate use tax (or sales tax) for that purchase. Now in reality how many businesses (or individuals) voluntarily report and pay use tax? Not many. In my opinion, I think the states will adopt a more simplified way of calculating and remitting sales tax so that e-commerce businesses can comply easier with the various sales tax laws.
In researching to write this article, I found this website that provides specific links to each of the 50 states laws regarding Internet Sales Tax. You can research further on your own the laws specific to your state. http://www.nolo.com/legal-encyclopedia/50-state-guide-internet-sales-tax-laws.html