Are you an online business that sells a taxable product on the internet? If so, you might be required to collect and pay state and local sales taxes. The criteria that determines whether you are required to collect and pay sales tax depends on if you have a physical presence in a particular state. This rule was established in a 1992 Supreme Court ruling that ruled that mail-order businesses, catalogue businesses and online retailers only had to collect sales tax if they had an office, retail store or warehouse in a particular state. If these companies don’t have a physical presence, the customers are required to report their purchases to their state and pay a sales and use tax.
Collecting and paying sales tax on online purchases can be very complicated. Currently residents of 45 states must pay sales tax on their online purchases. The sales tax rates for each state vary. In addition, within each state, counties and cities often have different sales tax rates resulting in many different rates based on the location of the point of sale. As a result, determining which sales tax to charge can be a real challenge. Because of this, many online retailers use online shopping-cart software services that calculate sales tax rates to handle their sales transactions.
If you are an online business selling retail products and you are required to collect and pay sales tax, it is important to calculate it and collect it at the time of purchase. Most states hold sellers responsible for the tax even when it is not collected at the time it was bought.
Not all states collect sales tax. Residents in Alaska, Oregon and Montana don’t pay any sales tax on retail purchases. In Alaska, however, local governments are allowed to collect sales tax. These taxes average a little over one percent. New Hampshire is another state that doesn’t collect sales tax. It does, however, collect taxes on restaurant meals, lodgings and car rentals. In the state of Delaware, retail customers don’t pay sales tax for goods and services. However, retailers are required to pay taxes on their gross receipts.
Currently a law is working its way through Congress that could potentially require online retailers to collect and pay sales tax regardless of whether they have a physical presence in a particular state. It is called the Marketplace Fairness Act of 2013. Although this piece of legislation has a name that sounds very reasonable and fair to everyone concerned, it could result in a compliance nightmare if you are an online retailer. One of the motivations for this law is that states have found that businesses are very compliant with regards to collecting and paying sales tax. Retail customers, on the other hand, have a low compliance rate when it comes to reporting online purchases. Another group that is pushing this legislation is the brick and mortar stores who feel they are at a competitive disadvantage because they are forced to collect sales tax, and many of their online competitors aren’t.
Regardless of the fairness issues, the Marketplace Fairness Act of 2013 will pose huge problems for online retailers who have to deal with the complexity of collecting and paying sales tax to multiple tax jurisdictions. If it passes, it will be especially harmful to the small online retailers. Large companies, such as Amazon and Ebay, already have the infrastructure and scale to easily deal with this law if it gets enacted. Many believe that this legislation will put small businesses at an even greater disadvantage with the retail giants and stifle their creation and growth. So far, it has passed the Senate and is being considered by the House of Representatives. If you are concerned about this legislation, I would recommend that you write to your congressman or woman, and check out the website called StopMFA.org.
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Written by: Mark J. Krupp, Cofounder of NewBusinessCreator.com