Are Your Business's Online Sales Subject to Sales Tax?

If you own an e-commerce business and sell products online, some of your customers may owe sales tax on their purchases. Whether you need to collect sales tax depends on where both you and your customers are located.

If your customers are in the same state as the physical location of your business, they owe sales tax on items they purchase from you. For instance, if you have a physical presence (such as a retail location) in Texas, you'll need to collect sales tax for all sales made in Texas. Even if a customer calls your California headquarters to order the product and the merchandise ships from a fulfillment house in Michigan, if the customer is in Texas and you have a store in Texas, you'll still be liable for collecting and remitting the sales tax.

The waters get even muddier if you use a third-party merchant account. If your customer is in the same state as your merchant account provider, the customer will owe taxes on any purchases that your provider processes.

The good news is that if you are shipping merchandise to a state where your business (or your merchant account provider) does not have a physical location, you do not currently need to collect sales tax.

Sales Tax Laws: Changes on the Horizon

The landscape for online sales taxes may be changing, however. An increasing number of state governments, as well as brick-and-mortar retailers, are pushing for a national Internet sales tax. States claim they're being deprived of millions of dollars of tax revenue they can ill afford to lose. And offline retailers, particularly in states that have high sales tax rates, say their online competitors have an unfair advantage.

As a result, more states are passing laws requiring Internet retailers to start collecting sales tax. In June 2008, for example, the state of New York began collecting sales tax from Amazon.com; in June 2011, the state of California passed a similar measure. While Amazon is based in Seattle, many of the retailers who sell goods through Amazon are based in other states. Amazon filed suit in New York arguing that the law is unconstitutional, and has taken steps to get a measure on the California ballot that would overturn the California law.

If states apply enough pressure going forward, they may persuade the federal government to pass similar legislation. In July 2011, for example, a bill introduced in Congress would require online retailers to collect state sales tax regardless of their location.

Whether these or similar proposals will change the rules remains to be seen. At least for now, all you need to worry about is collecting sales tax from customers located in the same states as your company's physical locations. Just keep on top of news regarding Internet sales taxes to be sure you're in compliance with any changes to the law in your state.