The Tax Man Cometh
How to Assess Sales Tax Obligations in Ecommerce
Whether it’s true that only death and taxes are certainties, the latter is a concern that lingers through life. If you operate an online store, it may be the headache you’d rather avoid. But usually you must collect them from most of your beloved customers.
Laws and rules governing sales taxes for ecommerce vendors are as variable as they are confusing. We’ll try to get to the basics and at least steer you in a direction where you can get accurate, reliable help.
The first reality to absorb is this: if you sell merchandise over the Internet and you have a physical presence in a “nexus,” or state, you are required to follow that jurisdiction’s sales tax laws – but only from customers who are subject to sales tax because of their residence in that state. Sounds pretty simple until you understand that there are 50 states to keep track of. Add to that the wonky official rule that if customers do not remit sales tax payments to sellers, they are technically required to pay them directly to their state. Don’t ask how that enforcement mechanism would work; truly, it’s anyone’s guess. Mostly only very high-end purchases would come to the attention of each state’s tax collector.
We’ll make it easy for you. Only five U.S. states do not impose a sales tax. They are Alaska, Oregon, Montana, Delaware, and New Hampshire. Now you know.
But what is your obligation in terms of making sure your customers pay up? That’s more confusing.
If you’re committed to avoiding future problems and doing the right thing at the outset, here are steps to take that will keep you in the clear:
Acquire a sales tax permit. Registering for a permit in the state where you are based is only necessary if that state collects sales taxes. The Department of Revenue is typically the governing agency, so locate yours and find out the process, the filing frequency requirements, and any related obligations. *Note that in many states it is illegal to collect sales tax without a permit, so don’t freelance on this one.
Set up a sales tax collection mechanism. Perhaps your service provider has a built-in function making it easy. Some offer precise tax-collection features pertinent to each state. If you don’t have this option, find a way to get it.
Learn the difference between destination and origin. If you ship to a customer in a state that does collect sales taxes, charge that state’s rate on each purchase. If your state requires collection based on where you are located – the “origin-based” designation – you will be charged by your state and required to pay up. Again, consult your state’s revenue agency for clarification.
Now file taxes. No one likes that phrase, but if you buy online sales tax software, you can cut through the red tape with little effort. These programs will even nitpick down to the varying counties and jurisdictions with add-on taxes. They make filing a breeze.
If you start out of the gate with a solid tax-collection strategy and are clear with your customers, you’ve saved a lot of time and trouble. Try including an estimated tax figure in shopping carts so prospective buyers are aware of it in advance. They will appreciate the heads-up.