Sales Tax for Internet Transactions: What Does the Law Say?
Rules on Collecting Sales Tax
Sales tax is collected by each individual state from the various businesses that opperate within the state. If you sell a taxable item you must collect the state sales tax and remit it at the proper time for your state. If you operate in a state, but have another location in another state, you must collect sales tax for both states. If you have only one location, but have agents or sales reps selling in another state, you will be collecting tax in both states since you have a “physical” pressance in both because of the sales force. If you do not have a physical presence in a state, that state cannot force you to collect sales tax. This rule came about from the Supreme Court ruling in the 1992 case of Quill v. North Dakota when North Dakota attempted to force a mail order business pay sales tax.
Establishing Residency
Residency is simply applied to any customer that lives in the same state where an Internet business has a physical pressance. An easy method of establishing residency for online sales tax collection is to use an automated shopping cart program. These programs signal the need to collect sales tax once the customer enters their shipping address if the shipping address matches the state of the Internet business. It should be noted that there are five states that do not collect any sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.
Determining Qualifications for Online Sales Tax
Internet businesses fall under the same rule as mail order operations. Therefore Quill v. North Dakota applies to all Internet business in the United States as well. This means that sales tax for Internet transactions follows the same ruling; whatever state your Internet business has a physical pressance in, it must pay state sales tax to that state. There is also the problem in many states of collecting state sales tax for only certain items such as clothing, software created for multiple sales, computer equipment or pre-paid phone cards.
Online Sales Tax Collection
Once you have determined who you must collect sales tax from, the problem becomes how to collect it. As previously stated, there are programs that can automate the process. Once the need to collect tax is signaled, the appropriate tax is added onto the purchase. How does the program know the appropriate state sales tax? This is set up by the business by entering the value of sales tax for Internet transactions in the appropriate box in the setup screen.
Automated Stores and Sites
Many large providers of selling platforms also provide free built-in programs to help calculate and collect sales tax for Internet transactions. Companies such as Amazon, eBay, PayPal and Etsy allow sellers to automatically include state sales tax into a template for the items they are selling. This action alone greatly simplifies online sales tax collection. You, being the Internet business, must remember to remit the tax to the state and then report the remittance to the IRS.
Sources:
U.S. Small Business Administration
Image Source: Courtesy of sxc.hu/svilen001
