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Are Your Web Sales Exposing You to More Taxes

By:

Barbara Weltman

Small businesses have found that selling on the Internet is a great way to boost sales, open new markets and expand business. Some businesses sell exclusively through this venue, such as eBay sellers; others use online sales to supplement traditional in-store sales. Regardless of the extent of your Internet selling, it is important to recognize that how you do business online can affect your tax obligations.

Sales taxes
Many small-business owners are under the mistaken belief that selling online relieves them of having to collect and remit sales taxes. Part of this belief may arise from the Internet Tax Nondiscrimination Act (P.L. 108-435), which prevents states from imposing sales tax on Internet access (e.g., on high-speed dial-up). The law generally does not extend to other sales.

Goods sold within your state. You must collect sales taxes on online sales to buyers in your state just as you would on in-store sales.

Goods sold out of state.Whether you have to collect sales taxes on items you ship to buyers in another state depends on whether you have a physical presence within that state. Merely soliciting orders in another state by mail, phone or Internet does not create a physical presence. But physical presence, however, slight, can be created by other actions, including:

Maintaining an office � including an employee�s home office if you represent it as a company location to the public.

Inventory storage � warehousing inventory in another state.

Sales agents � sending a sales force into another state.

,li>Internet service. It may be possible that something as minor as having your Web page hosted by an out-of-state provider can create a physical presence in that state.

Safety states. There are five states with no sales tax � Alaska, Delaware, Montana, New Hampshire and Oregon.

If it�s convenient, consider storing inventory or using an ISP in any of these states to avoid out-of-state sales tax collection problems.

Resale protection.If you are buying goods � in or out-of-state � to resell to your customers, you are exempt from sales tax. To claim exemption, tell the vendor that you are buying for resale and provide your state resale number. (Some states make it more difficult than others to use an out-of-state resale number.)

Collection procedures. With over 7,000 sales tax jurisdictions in the U.S., keeping track of different rates and rules can be a daunting task. Once you identify a state in which you are doing business, be sure to determine your obligations there. Small businesses may, for example, be able to rely on flat rate collections (rather than rates specific to each locality). Use sales tax software to assist you, such as Taxware�s Sales and Use Tax Solution (www.taxware.com/solutions/salesusetax.html).

Use taxes
When you buy equipment and supplies on the Internet from a vendor in another state, you may escape sales tax (if, for example, the vendor has no presence in your state and therefore is not required to collect the tax). However, this doesn�t mean you�ve successfully avoided tax. Technically, it means the responsibility to pay the tax has shifted to you, and it is called a use tax. If your state has a sales tax, it has a corresponding use tax.

As a practical matter, state sales tax authorities may not track down all out-of-state purchases. However, in order to collect badly-needed revenues, states are certainly on the look out for tax on big-ticket items, such as heavy machinery.

Caution: State authorities typically check for unpaid use taxes when examining a business�s sales tax collections.

Get help
The rules for sales and use taxes are complex. Consult with a tax advisor who specializes in this area of the law.