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What You Need To Know About Internet Sales Tax (Part 1 of 2)

eCommerce is still a fairly new industry, fraught with many unprecedented challenges — one of the biggest of these for American eCommerce is the question of sales tax.

Although sales tax is nearly universally collected, the concept has been difficult to apply to businesses with no physical locations. Because these funds are under the control of the individual state in question, the ethereal nature of the Internet has complicated a previously straight-forward tax for everyone online, whether they sell across the state or utilize extensive global fulfillment services.

Know Your Tax Obligation

When you start a retail business, some of the first questions you ask should be about your sales tax obligations. Uncle Sam is a stickler for rules and he doesn’t like missing out on the portion that’s his — so make sure you’re collecting in these situations:

You have a physical retail location. If you’ve got a location that collects sales tax and an online extension of the same business that sells the exact same things, you should collect sales tax when it’s applicable to your state. You may argue that your purely online side is exempt, but as long as it’s not a separate entity tax away.

Your buyer is located in the same state as you. Purely online stores are only required to collect sales tax from buyers living in their own state. This is because, in theory, those out of state buyers should be paying taxes to their home state on the purchases they make from your store. Will they? Do they? The answer is likely no, since enforcement is currently next to impossible.

You have distribution warehouses in other states. If your distribution hubs are located in another state, you’ll also have to charge sales tax to residents of that state, as well as your own. This is because of a 1992 Supreme Court ruling that allows businesses with any type of presence to be taxed by the states, regardless if they have an actual retail location there.

Several states don’t collect sales tax, though, including Alaska, Delaware, Hawaii, New Hampshire, Montana and Oregon. If you live in these states, you don’t have much to worry about when it comes to tax collecting, at least for now. There are also some state-by-state exemptions on sales tax for things like clothing and food, so check with your Department of Revenue before you settle into your tax-collecting duties.

*Editor’s Note: For all tax-related matters, be sure to consult your own financial advisor directly.

February 03, 2015
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