If you are establishing an Internet business, you are probably wondering if you need to collect sales tax. The issue of sales tax varies state-by-state, so this is a very basic guide to your potential responsibilities.
Rule of Thumb
The rule of thumb governing sales tax and online stores actually stems from a Supreme Court decision governing mail-order businesses in the 1990s. According to this ruling, you must collect sales tax if your business has a physical presence in a state. This physical presence is called the business's "nexus," and can be anything from a warehouse to a home office to an actual bricks and mortar storefront. If the business does not have any kind of physical presence in any state, then it does not have to collect sales tax.
Sales tax is then collected on orders shipped to customers within the same state (or states) in which the business has a nexus. Sales tax is generally not collected on orders shipped to areas in which your business does not have a physical location.
When In Doubt, Collect
The rule of thumb governing Internet sales tax is very broad indeed, as tax laws vary state by state. For example, some states do not charge sales tax at all. Other states, particularly New York, charge a "use tax" to consumers who do not pay sales tax. This use tax is similar to sales tax, but is charged to the buyer if she does not pay sales tax on a certain purchase. Use tax is reported on the buyer's personal income tax annually.
If you fail to collect sales tax and later find out you should have been collecting all along, the consequences can be quite severe. There is no statute of limitations on collecting back sales tax, and you would be liable for all penalties and interest accrued over the period of time you failed to collect. These penalties and interest, not to mention the original amount of sales tax owed, can be catastrophic to you, the small business owner.
Seek Professional Help
The wisest course of action is to consult a tax professional in the state in which you have your business nexus. These tax professionals are trained in the interpretation and implementation of tax law and can best advise you on the specifics of your situation. Once you have an idea of whether or not to charge tax, and how much, the shopping cart feature of your online business can be programmed to figure sales tax automatically on incoming orders. This will save you a lot of guesswork and make the entire process seamless.
By taking your business online, you can reach thousands of customers globally with just the click of a mouse. By educating yourself on tax law, you will save a lot of headaches and potentially dire economic consequences in future.
Sarah Baker is a documentary filmmaker and writer currently living in New Bern, NC. Her first book, Lucky Stars: Janet Gaynor and Charles Farrell, will be published December 2009. Read more about her.