Anyone who deals with business of any sort, especially in the United States, knows that since businesses started to move online, sales tax laws weren’t broad enough in scope or complexity to handle this form of business interaction. At first many states more or less hand-waved it because, I suppose, it may have been too much effort for too little gain in the beginning of things?
Now states are suffering because many of the businesses income is coming from the internet. A year ago about 15% of sales were from the internet. This may not seem like a lot, but when you are talking about 15% of all sales tax on millions of dollars in retail sales is a lot of money that the states are loosing. So in 2012 there has been a big push to compensate and try to fix the this loss.
Online Sales Tax?
This issue actually is based on the basic idea of “where” a sale takes place. Up to now most retailers weren’t required to charge sales tax upfront for online sales as they would at a brick-and-mortar store. Online there really isn’t a “place” where the sale is processed, unless one wants to get nit-picky about where the physical server is located, or maybe where a physical store or distribution center might be found. So a lot, and I mean a lot, of people flocked to the various online stores for what they considered a “savings”.
Now, it is my opinion of course, but I believe this is one of the reasons the economy in so many places began to tank. Sales tax on items goes into the state’s governmental system and helps pay for things from schools, road repairs, public works, politician paychecks and more. Now some states do not require sales tax of any kind, but they have a financial structure that copes with that lack of income. Other states do not and they suffer for it.
Different Strokes for..
That is another important point to consider, and also why collecting sales tax online is so mind-boggling complex. Each State has it’s own laws, limitations, and requirements. There may only be only three forms of sales tax requirements (point-of-sale, use tax, destination), however because there are 50 states with multiple different laws in effect, it gets dicey.
Companies are no longer limited to brick-and-mortar stores, where before they had to worry about where these stores were located and thus abide by that state’s sales tax laws. As they are now a world-wide seller of goods and services, the question then come to the “how” do they get taxed?
The three basic types of sales tax are; point-of-sale, use tax, and destination based sales tax. As they are different in their approach (use tax is paid by the consumer, while point-of-sale and destination are paid by the company), they can cause conflict in how something is taxed.
Added to that, each state allows for some things to be taxed while others are not. This is the biggest part of the problem with online sales tax.
Some states’ laws are a bit more specific and have actually gone after affiliates. These states are claiming that affiliates who live in a given state thus represent the company by acting as a point of sale for a given taxable product. In other words, the physical person becomes the physical presence that some states require to collect sales tax from sales.
Amazon actually canceled a number of contracts with California affiliates (among other states) because of this requirement.
So Why Is This Important Now?
The Tax Revenue Service is stepping up it’s efforts to go after businesses that are non-compliant. This includes smaller businesses, like the artist who sells prints of their works online from their personal website. Or a freelancer who works out of their home office (some services are taxable!)
If you work through a separate company, it is imperative that you double check their policy on sales tax. Don’t just scan the TOS, read it! Etsy, for example, puts the responsibility of taxing the customers on the shop owner.
If you don’t handle the issue of taxes with a serious heart and mind, you could get audited. A severe enough audit can shut down any business. The government caught Al Capone on a tax audit discrepancy. So don’t think it couldn’t or wouldn’t happen to you. Be prepared.
What to do?
Larger businesses often have their own accountants who are in charge of overseeing this sticky tax issue. But what about smaller businesses? Or the lone artist, artisan, craft-fair vendor, or freelancer who knows nothing of the various and often complex tax codes? There aren’t many options beside educate yourself and keep up to date with the various court cases, and law suits that affect the large companies.
It’s these legal proceedings that determine the end-result laws which are then put into place to govern all businesses. With how vast and complex the internet has become over the years, this information isn’t too hard to find. Your best bet however is to look for the small-business journals, and if you don’t understand something then leave a comment on the article.
Also, double check the post date of these articles. What may be applicable today may not be applicable 2 months from now.
One such website for the Web Designer (Website Magazine) has published a pdf file talking about this specific issue. It is sponsored by a tax-program AvaTax, just to be aware. However, a point they make that I feel is very important is to automate your tax collection systems and be sure that any online sales carts give you options to adjust for specific sales tax needs of a given state.
Why automate? Running a business by yourself, especially for freelancers, means you are working in various different positions at different times. Why put more work on your shoulders, and more hours required in your day, when you can get the help of today’s technology to stream line the process? The sooner you get a system set up to handle this, the better as it then reduces the over all amount of work you’ll have to do.
There are more programs out there, some free for a trial period, other free as a low-end option. All of them are worth looking into to help the small business owner keep “above the board” when it comes to taxes. Why suffer later for what you can prevent today?
The programs I list below are not the only ones, but they are ones I have had at least some personal experience using. Or they are by companies I have found helpful in the past.
- Turbotax has a business tax software bundled with a tax prep program.
- Outright has different levels of accounting software (online) depending on your needs and desires.
- Consumer Rankings offers a list of the top most popular tax programs.
Is there an online tax program that you use? If so please feel free to leave a comment with a link! I will be collecting these as a separate post.
- Sales Taxes for Online Retailers Move Closer to Reality
- US Census Estimated Retail & E-Commerce Sales PDF