Sales Tax – E-commerce And Small Business

If an online business has a physical location in a certain state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule originated from a 1992 Supreme Court decision which declared that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

Online shoppers who live in a state that collects sales tax are officially required to pay the tax to the state even when an Internet retailer does not collect it. When shoppers are required to pay tax directly to the state, it is referred to as “use” tax instead of sales tax.

The revenue collection agencies in most states now have some kind of formal position on e-commerce sales. Most states treat the sales in the same way they treat mail-order sales; however, you should contact your state tax agency and ask for help and information with regard to your particular business to be sure.

State governments and brick-and-mortar retailers are in the hunt for legislation to overturn the 1992 Supreme Court ruling. Missing out on tax revenue from online purchases is maddening for state governments, so expect changes in the future.

Practical example: Suzie found the perfect birthday present for her husband but can’t find them in California, so she orders the gift online from a gift shop with headquarters in Texas. The supplier has all of its facilities in Texas and collects payment in Texas. Suzie does not have to pay California sales tax (or Texas sales tax) on the gift.

A few months later, the online business opens a warehouse in California to handle its online orders for the entire country. Suzie continues to order gifts from the same company in Texas but she must now pay California sales tax.

Should Internet commerce remain exempt from sales taxes to encourage the growth of online business or should it be subject to the same taxation faced by storefront companies is not our place to decide, but it is a concern for all selling and buying online.



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