When you sell products or services over the Internet, your obligation to collect sales tax is determined by the location of the buyer. If the buyer is located in a state where a sales tax applies, and your business has a physical presence in that state, you must collect the sales tax from your customers and pay the tax to the taxing authority. There may also be local sales taxes that apply.
If you sell to a buyer located in a state that has a sales tax, but your business has no physical presence in that state, you are not obligated to collect sales tax. This is based on a 1992 Supreme
Court ruling that states cannot require businesses to collect sales tax unless the business has a physical presence or “nexus” in the state. In those cases, the buyer is required to report and pay the “use” tax that applies on the products or services purchased.
You may have a physical presence in a state other than where your principal place of business is located. According to the Online Merchant Network, you may have “nexus” and therefore sales tax responsibility in a state if you have an employee in that state, you or someone on your behalf travels to that state to make sales, you attend trade shows or other promotional activities in that state to generate sales, you do substantial advertising in the state, or you own or lease any real or personal property in the state.
You also need to be aware that states are increasing their efforts to collect sales tax, due to the considerable fiscal revenue involved. Effective June 1, 2008, New York State requires online merchants who have affiliates in New York to collect sales tax, even when the retailer has no physical presence, if a total of $10,000 or more a year in revenues is generated. Several states are joining efforts to push for a Streamlined Sales and Use Tax Act, which would require Internet sellers in the participating states to collect sales tax on purchases to customers in any participating state.
To collect sales taxes, you need to get a sales tax license from your state and/or local taxing authority. Then on each taxable transaction you calculate the applicable sales tax and collect it from the buyer. You need to keep records and file a tax return and pay the taxes to the state and/or local government. You will need to file a return and pay the taxes either monthly, quarterly, or annually, depending on the taxing authority’s rules and your level of sales.
Each state and locality has its own rules regarding what products and services are subject to sales tax, so you will need to be familiar with the sales tax law. According to Rhonda Abrams writing for USA Today, some items that are commonly, but not always exempt from sales tax include prescription drugs; groceries and non-prepared food; animal feed, seed and many agricultural products; and products for resale, such as raw materials, inventory, and other items that your customer is going to sell rather than use.
As Jean Murray explains in “How to Collect, Report, and Pay State Sales Taxes”, when you start selling you should first go to your state Department of Revenue website to register for your sales tax permit. Most states allow you to register online. You can find links to these websites for all the states on the Sales Tax Clearinghouse website.
Once you receive your sales tax permit, you can start collecting sales tax from your customers. You should show the sales tax separately on your invoices. If you are selling in different cities or counties in your state, you should charge the correct amount of tax, including the state tax and the applicable local tax. If you are selling in states where you have nexus, you must charge the sales tax in those particular states. If you sell to resellers, they should provide you with a copy of their reseller’s permit or resale certificate, so you don’t have to charge them sales tax.
You should keep a separate account on your business books for the sales taxes you have collected. If you have collected sales taxes for different taxing jurisdictions, you should keep separate sub-accounts or a subledger for the Sales Tax Payable account to keep track of each sales tax separately.
You will have to file a sales tax return and pay the sales taxes you have collected, on a monthly or quarterly basis, depending on the rules in the sales tax jurisdiction and the amount of your sales. You can find information on the rules for filing the returns and paying the tax by following the links to the individual states’ Department of Revenue websites, which you can find on the Sales Tax Clearinghouse website. Most states allow you to file the sales tax return and pay the taxes online.
If you are obligated to charge sales tax in various states and localities, you may want to use a software program to keep track of them. The Streamlined Sales Tax Project (SSTP) has certified a group of private companies called Certified Service Providers which can provide software to track tax rates and policies. John Doyle, President of the SSTP, as quoted in Online Merchant, indicates that STTP’s Governing Board will pay the Certified Service Provider’s fee incurred by out-of-state merchants. You will be responsible for the fee for collecting sales tax from your in-state customers. Certified Service Providers include SpeedTax, Avalara, Exactor, and Taxware.
“Calculate sales tax over the Internet” – Sales Tax Clearinghouse
“Internet Sales Tax: Are Changes Coming” – Online Merchant Network
Jean Murray, “How to Collect, Report, and Pay State Sales Taxes” – About.com
Rhonda Abrams, “Sales tax rates and rules tricky for small sellers” – USA Today
“Certified Service Providers” – Streamlined Sales Tax Governing Board, Inc.