The laws and regulations governing the sales tax obligations of online merchants are often misunderstood or misinterpreted. You only need to look at the questions posed on Internet forums, such as the Online Merchant Network, to see that online sales tax laws are confusing to many budding e-commerce entrepreneurs.
The fact is that when it comes to taxing Internet sales, the small business owner needs to wear a different cap – that of tax collector. As the operator of an online business it is your obligation to levy the appropriate taxes on your customer and remit it to the state.
Sounds relatively simple so far? Well, maybe, but the rules governing where and when that sales tax must be levied are a little more complex.
Below is an example:
A customer in Virginia orders an item of furniture from an online retailer in North Carolina. The retailer’s entire operations are based in North Carolina. The Virginia-based customer is not required to pay North Carolina sales tax (or Virginia sales tax) for her furniture item and, in this instance; there is no sales tax collection requirement for the retailer.
If the North Carolina-based supplier establishes a physical presence in Virginia, the Virginia-based customer would then be required to pay Virginia sales tax on the furniture item, even thought that item was purchased online.
To simplify the underlying regulations behind these examples, I’ve included below the basic rules that govern the online sales tax requirements that every online retailer needs to comply with.
When to Collect Sales Tax for Your Online Products
If your business has a physical presence in a state, you must collect applicable state and local sales tax on Internet-based purchases made by your customers in that state. This presence is referred to as a “nexus”.
As a general guideline, if your business meets any of the criteria below, then it qualifies as possessing a nexus in a state:
- You own or lease real property in that state.
- You have one or more employee based in that state.
- Your business sends representatives into a state on business travel to make transactional sales.
- You conduct marketing into a state with the end goal of generating sales. Marketing can be defined as trade shows, advertising, or other promotional work.
When You Don’t Need to Collect Sales Tax
There are a few exceptions that you should be aware of:
- If you do not have a presence in a particular state, you are not required to collect sales taxes.
- Certain states do not have a sales tax requirement; these include Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon.
- Select items such as food and clothing are exempt from sales tax in most states.
Where to Find Help
If you are uncertain whether or not your business is required to collect sales tax in a particular state, contact your state’s revenue agency.
Here are some additional resources for making sure your online business complies with federal and state regulations: