A question frequently asked by astute online business owners is, “should I be collecting sales tax on the sales I am making?”
The not-so-astute online business owners never think to ask the question and continue to operate under the “ignorance is bliss” business model. The bliss usually ends when the authorities come calling.
So, Should I Be Collecting Sales Tax?
The short answer is “maybe,” but that’s not really helpful, so let’s flesh it out a bit.
In the offline world it’s more straightforward for business owners. If you own a storefront in a particular physical location and are making sales of products or services subject to your jurisdiction’s sales tax, you obviously are required to collect the tax and remit it to the appropriate authority.
In the online world, you have no physical storefront, so what are you to do? Should you still be collecting sales tax? You may be selling your products or services to customers all over the world. Do you still collect the same sales tax you would for a physical store in your location?
Not usually. Here’s how it works.
If your online business has a physical presence in a particular state or municipality and that state or municipality imposes a sales tax, you are required to collect the tax and remit it to the government when you make a sale to a customer from that jurisdiction.
If you are selling to a customer from another state, one in which your business has no physical presence, you are not required to collect the sales tax.
A “physical presence” is just what it sounds like. Your business, or part of it, is physically present in the jurisdiction. That means, for example, that your business has an office, store, or warehouse physically located there. If you’re into legalese, this is called a “nexus.”
Let’s look at an example to help make it clear.
Suppose Sneaky Pete resides and works in California but prefers to buy his “supplies” from an online business located in Colorado which assures him that all merchandise will be shipped to him in plain, unmarked boxes. Further suppose that the Colorado business has no physical presence in California.
Under those circumstances, the Colorado company has no legal requirement to collect or pay sales tax, either to Colorado or to California.
Let’s change the example. Suppose the Colorado company decides it would be cheaper and more efficient to have a warehouse in California to serve its west coast customers and so opens a warehouse in California.
Now, the Colorado company has a “nexus” to California and is legally required to collect the California sales tax from Pete and remit it to California.
One thing that many people making purchases online fail to realize is that, even though they are not charged a sales tax by the company from which they purchase, their own state requires them to report the sale and pay the tax that would have been owed had they made the purchase from a business located within their home state.
This is often referred to as a “use tax,” because the state is taxing its resident’s “use” of the product within the state since it did not get to tax the “sale” of the product when it was purchased online. You know what they say about the two things you can’t avoid – death and taxes.
States are becoming more aggressive about enforcing their use taxes because so many sales are now being made online.
You should also be aware that not all states impose a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon do not have sales taxes as of this writing.
Even in states that do have sales taxes, there are usually some items that are exempt from sales tax under the particular state’s law, and the sales tax rates vary from state to state.
It is not just states that a business owner must be concerned with. Many cities and counties also impose sales taxes.
Figuring out when and how much sales tax to charge can be a formidable challenge for online business owners. One solution is to use one of the online shopping-cart software solutions that will calculate the appropriate sales tax for you automatically.