The primary determinant of whether or not you need to collect and pay sales tax is if you have a physical presence in the customer's state. Sounds simple enough, right? Wrong. Determining whether you have a physical presence, or a level of activity that would require you to collect and remit sales tax, what taxing bodies refer to as "nexus," can vary from state to state. It may be owning or renting property in that state, having a warehouse or a fulfillment house that maintains inventory for you in that state, having employees in that state or promoting your business in that state through something like a trade show. For example, let's say Sue Jones, who lives in Massachusetts, has an eBay store. She runs everything out of her house. She maintains all of her own inventory and doesn't go to or sell at trade shows. Sue only needs to collect sales tax from customers in Massachusetts. However, if Sue's business expands and she decides to use a warehouse or fulfillment service in Ohio, now she is obligated to collect and pay Ohio sales tax when selling to customers in Ohio. To learn more about nexus and what your state's guidelines are for determining it, do an online search with the name of your state and the words sales tax and you should be directed to your state's Department of Revenue Services. You can also visit the Helpful Information page on the Sales Tax Institute's Web site. Under "Sales Tax News and Tips" you can click on the topic called "Nexus." Once you determine nexus, you need to figure out which items in your inventory are subject to sales tax in those states you have nexus in, explains Richard Stim, a Nolo editor, small business attorney and entrepreneur who writes about Internet sales tax. Again, your state's revenue services/tax-related Web site or the Sales Tax Institute should be able to provide you with this information.
A Note About Selling Electronic or Digitized Products
In some states, such as California, if you are selling downloadable software, it's considered intangible, no matter where you ship it and therefore not subject to sales tax. However, if you are a California business and you ship that same software on a CD to a customer who is also in California, it's considered a tangible good and taxable. Illinois, on the other hand, currently makes no such distinction. So if you are selling a downloadable product, like software, you need to determine if in those states you have nexus in, if that good is considered taxable or not.
You cannot legally collect sales tax without being authorized to do so, which means being registered in those states in which you have a physical presence. "Collecting tax without having a valid license is considered criminal fraud, and you could go to jail," says Diane L. Yetter, the founder of the Sales Tax Institute and the president of Yetter Consulting Services, Inc. So it definitely pays to register. How to Determine Sales Tax
Probably the easiest way to ensure that you are collecting the appropriate sales tax is to work with your shopping cart vendor, if you have one. Most commercial shopping cart vendors can program your cart to calculate sales tax due on applicable items and in applicable states as long as you provide them with that information. If you don't have a shopping cart system or a vendor who can help you with the sales tax issue, "there are a couple of providers out there that have fairly inexpensive sales tax rate tools," says Yetter. The two she recommends for small and mid-size businesses come from Tax Data Systems and the Sales Tax Clearinghouse. Selling through eBay, Amazon or Other Third-Party Sellers
Think of businesses like eBay and Amazon as very sophisticated shopping cart systems. While they may be able to calculate sales tax for you, you are responsible for telling them which items are taxable and which sales tax states you have nexus in, and of course, for paying the sales tax to those states. How to Pay - And Consequences If You Don't
If, for example, you have nexus in Massachusetts and have gotten a sales tax permit or license to collect Massachusetts sales tax, you will need to file a Massachusetts sales tax return and remit all sales tax proceeds with your return. "How often you file depends on your volume," says Yetter. If you are a micro business, you probably only have to file once a year. However, "if you're somebody like Sears, you do it once a month with pre-payments," she says. Depending on your volume, you can pay monthly, quarterly, semi-annually or annually. In each case, the state will send you a sales tax return form with instructions, which you will need to fill out and return along with any sales tax due. What's the worst thing that could happen if you don't register or file a sales tax return? "If you have never filed a sales tax return and have never been registered for sales tax, the state could audit you," says Yetter. "The average sales tax across the country is eight percent. So let's say you did $100,000 of sales a year in a state where you had nexus, where there was sales tax. And you didn't collect the sales tax. The state could come and get eight percent of that $100,000 plus interest plus penalties for every year you didn't collect and pay sales tax. That could put you out of business." Jennifer Lonoff Schiff is a regular contributor to ECommerce-Guide.com and writes a blog for small business owners.
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