With revenues from online commerce growing every day, the question of sales tax on internet transactions has been raised time and time again. Questions abound regarding how to charge internet sales tax, rules regarding the taxes, how they are paid, regulations according to state, etc.
Below is an overview of internet sales taxes and what they mean for your small business.
What’s the Rule?
Currently, the collection of internet sales taxes is regulated by state governments. Because tax rates and tax collection procedures vary across states, and internet tax laws are not uniform across the U.S., this lack of uniformity is one of the reasons there has been interest in passing a federal law regulating internet taxes, such as the Marketplace Fairness Act.
In 2002, 40 states banded together to form the Streamlined Sales and Use Tax Agreement (SSUTA), which simplified sales tax codes to make collection easier. Under this agreement, the collection of sales tax is still voluntary. As of today, 24 states have passed SSUTA-conforming legislation, and all but four state legislatures have expressed interest in doing so.
States with no state sales tax include Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon, and these states are not required to collect sales tax on online sales, regardless if they have a physical location in the state or not. For example, arguably the largest online retailer in the world, Amazon is currently required to gather sales tax on purchases made in only 23 states. Other brick-and-mortar retailers that have multiple locations in different states are also required to collect internet sales tax.
Does the Federal Government Have Any Say?
Yes and no.
Officially, there is a bill called the Marketplace Fairness Act (MFA), which passed a vote in the Senate on May 6, 2013. The MFA would enable state governments to collect sales taxes and use taxes from remote retailers with no physical presence in their state. However, in December 2014, House Majority Speaker John Boehner kept a revised version of the MFA from coming up for a vote. It could still be revived, but as of the end of 2014, it was not passed or enacted.
What Does the MFA Say?
The Marketplace Fairness Act makes concessions for online and catalog businesses to collect sales tax on goods and services sold in states where they do not have a physical presence. Currently, sales tax is levied on items that are ordered online from retailers that have a physical presence (e.g. brick-and-mortar retail storefront or corporate office) in the state wherein the order is placed.
It also states that businesses that generate less than $1 million per year and do not have a physical presence in the state would not have to collect sales tax.
So Do I Have to Collect Sales Tax for Online Purchases?
Yes. Even though the MFA didn’t pass, you are still responsible for collecting sales tax for online purchases. As mentioned above, sales tax oversight is currently handled by state governments and is therefore required if your business meets the criteria.
Where Can I Find Out About the Online Sales Tax Laws in My State?
This guide from NOLO.com is a great resource to discover what your state’s current requirements are in regard to internet sales tax.
How Can I Be Sure I’m Doing It Right?
There are a couple quick questions you can ask yourself to determine if you should be collecting sales tax from online purchases:
- Does your business currently generate more than $1 million in revenue per year? If no, then you do not need to collect online sales tax. If yes, ask yourself the next question.
- In what states does your business have a physical location?
Keep in mind that a physical location, or “nexus,” in legal terminology, can be defined as a storefront, warehouse, manufacturing facility or office. For example, if you have an office in California, a warehouse in Michigan and a storefront in Ohio, you would need to collect sales tax from any customer placing an order from these states.
Make a list of all of your locations, including any that fall into the categories listed above. When a customer places an order from one of these states, you’ll need to collect internet sales tax on that purchase.
If you currently sell goods online, check with your e-commerce software provider to see if there is a plugin or similar feature that you can use to calculate sales tax on online transactions. It will make your life and your bookkeeping much easier if you automate the process.
While selling online can greatly impact your revenue and raise your profile across the country, you’ll need to pay sales tax to those states in order for everything to be legal. So it’s best to know the rules and how they apply to your business before your online revenues get you in trouble with the dreaded taxman.