Figuring out online sales tax can be something close to a nightmare. It used to be that everyone "knew" that online shopping was tax free. These days, though, crossing a state border can make a world of difference in your level of obligation. I get a little worried just thinking about it because while the IRS isn’t concerned about sales tax, state tax bureaus are—and they can be just as aggressive in tracking down money they consider theirs.
It’s not impossible to untangle the online sales tax mess, but the risks of getting it wrong make a visit to a local tax professional a wise move. You can get a headstart by taking a look close to home.
Your state’s laws
One of the biggest difficulties when it comes to handling online sales taxes is that there’s no single set of rules in place to cover every state. In Maryland, where I live and operate my business, I’m expected to collect sales tax on all sales made within the state. According to the state comptroller’s office, anyone who maintains a nexus, or place where business operations occur, within the state is also expected to collect sales tax—but there is no single resource for out-of-state sellers who happen to sell online.
In most cases, you’re under no obligation to collect sales tax for states where you don’t have a nexus. That usually means an office, but (depending on the state) can also include a warehouse or business trips on a regular basis into the state for the purpose of conducting business. Those rules are based on a Supreme Court decision about mail order purchases. A good general rule is that if you aren’t doing anything else in a given state besides shipping to a buyer, you don’t need to pay sales tax. For instance, when I sell an ebook to someone outside of Maryland, I don’t need to charge sales tax because Maryland is the only state where I have a presence.
Unfortunately, there’s no guarantee that the situation will stay this simple. Even if you aren’t planning to eventually expand your business’ presence to other states, you may find yourself expected to collect sales tax for all online purchases if certain state governments have their way.
Your e-commerce software
It’s also important to consider what sort of software you’re using to handle online sales. Many of the simpler online shopping carts have only basic sales tax functionality, leaving you to figure out the details on your own. But some allow you to set sales tax rates for buyers who list a specific state in their information. While sales tax wasn’t the most important feature I was looking for when I chose the shopping cart tool that I use on my websites, I was pleasantly surprised to find that the software handles sales tax readily and it generates reports that let me cut a check to the appropriate tax agencies.
If you’re not sure on how to configure your shopping cart for sales tax collection, it may be worth bringing in some outside help to get your tools in order. Virtual assistants who specialize in setting up shopping carts can often help. You will need to be able to supply an idea of how much sales tax you need to charge, which may require some digging if you live in a state where sales tax rates differ by county or municipality. Most shopping cart software developers employ support staff who can help you, too.
Stay aware of changes
Sales tax questions are going to remain difficult, especially since online sales tax has yet to be ironed out with a universal answer. If selling online is a major part of your business, it’s important to stay abreast of the discussion, both in your own state and in any states you have customers in. The alternative can be a tax bill with plenty of fees and penalties added on.
Check your state’s comptroller’s office or revenue service to see if they offer mailing lists or other notification services. Many CPAs provide newsletters or blog about tax rules in their local areas—you may want to ask any tax professionals you’re already working with about the sources they use.
In many states, sales tax is a key revenue source, which pays for schools, roads, and other public services. Those states are likely to look for opportunities to make an end run around the Supreme Court decision which effectively removed any responsibility for online sellers to collect sales tax in states they don’t have a presence in. With that end in mind, twenty-three states have already streamlined their sales tax collection process and more are moving in that direction. With so many states backing the effort, it seems possible that there will be a requirement to collect sales tax nationally, eventually.