Internet Sales Taxes Question as Thorny as Ever
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
With more and more businesses selling at least some of their products and services over the Internet, how to collect and report sales tax is becoming more and more complex. In the past, when a business made most of its sales to someone living in the same state – if not the same city – keeping up with sales tax was a matter of making sure you met your state's requirements and cut them a check. But if you're selling to buyers who could be located anywhere they can get access to the Internet, handling sales tax can require you to be an expert of the rules for each state in which you do business – and possibly even a few foreign countries, too.
Beyond Sales Tax Assumptions
One of the most persistent assumptions about handling sales tax on purchases made over the Internet is that the seller simply doesn't have to deal with sales tax. While that's true in some situations, it certainly isn't universal.
Jason Shinn, an attorney specializing in ecommerce, describes the sales tax landscape:
First, in states that impose a sales tax, a buyer is obligated to pay that sales tax due on Internet purchases to the same extent an item would be taxable in an actual store. The common belief is that most people do not remit the sales tax that would be due, thus depriving states of a significant amount of tax revenue in the aggregate.
Second, an e-commerce merchant may have an obligation to collect the applicable sales tax on Internet sales if that merchant operates within the state. This is because courts have interpreted the Commerce Clause of the U.S. Constitution to prohibit a state from requiring an out-of-state- merchant to collect sales tax on Internet sales made to in-state residents, unless the merchant has a substantial physical presence in the state.
"Third, states have taken the position that an out-of-state seller has an in-state presence if it uses third parties to make sales. So in-state businesses that earn revenue through affiliate relationships, e.g., an individual clicks on website that links to online retailer such as Amazon.com ,would create an in-state presence for that online retailer. This expansion is obviously targeted at big online retailers like Amazon.com, which has numerous such affiliate arrangements. In fact Amazon.com recently announced it was ending such relationships for a particular state rather than be held liable to collect that states sales tax on Internet purchases.
"So for this reason it is important for e-commerce merchants to understand their Internet sales tax collection obligations and how those obligations may change depending upon their physical operations and third-party contracts with affiliates. This is especially true in light of the significant deficits many states face and the need to find revenue to cut those deficits.
Understanding Nexus
Most businesses have a home base – some location that is used to determine where the company is licensed and where it pays taxes. Typically, you can expect to pay your income tax and sales tax for local purchases to the state where you're based. But with online sales, there can also be a question of 'nexus' – whether or not you have a presence in another state that could be used as justification to require you to collect sales tax, there.
Scott Newman, of US Markerboard explains the concept of nexus: "Basically do you have a ‘presence’ in that state? If you send a sales rep into a state to visit a client, you have now created ‘nexus’ and could very well be on the hook for income tax, which will lead to you collecting sales tax. States are now targeting manufacturers that drop ship products on behalf of out of state internet dealers. The manufacturers are now collecting sales tax from the dealers, but because the dealer is not registered in the particular state with which the shipment is going, they cannot collect back or get reimbursed from the buyer for the tax.”
The On-Going Question
The sales tax question is only going to get more complicated as states search for revenues. Newman points out, “First, states are becoming much more creative in how they ’find’ the sales and use tax that is due them. For example, there are states such as New Jersey where you must register to do business there or you can't receive payment from a public school. And although the public school is tax exempt, they now have you registered and could very well be liable to collect sales tax."
The issue is far from settled, and states are coming up with their own legislative solutions. Something as simple as requiring online sellers to collect sales tax can have far-reaching impact, like leading tax collectors to consider whether a business should pay income tax as well, since they're already collecting sales tax.
For small businesses, it's important to stay on top the issue. It's a good idea to consult with an ecommerce or tax professional to get a more in-depth analysis of your business' sales tax compliance needs. Don't expect the solution to be simple, at least not until Congress legislates a uniform system suited for Internet retailers big and small.
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