When You Must Collect Sales Tax...

Barbara Weltman ...On Your Online Sales

According to the U.S. Department of Commerce, online sales in 2002 made up 1.3% of all retails sales. With over 7,500 different sales tax jurisdictions within the U.S., do you have to know the rules in all of them when you sell over the Internet and potentially have buyers in each and every one?

For example, if you’re based in Maine and a customer in Arizona clicks on your Web site to buy a Christmas tree that you’ll ship to him, do you have to charge sales tax on the transaction? You better know the answer to avoid underpayments that can trigger unwelcome audits. If you incorrectly fail to pay sales taxes to your state, the state can come after you for back taxes, interest and penalties that can be disastrous to your business. California estimates that it lost over $10 billion in uncollected tax on Internet sales in 2003 alone, and in this revenue-starved environment, collections will not be overlooked.


Generally, your responsibility to charge sales tax is determined by where you are, not where the buyer is. All states and the District of Columbia have sales taxes except Alaska, Delaware, Montana, New Hampshire and Oregon. Where you are is based on your connection, or “nexus,” to a state. If you have a physical presence in a state (e.g., you have an office, warehouse or sales force there), then you are subject to its laws on sales tax.

Under the nexus rule, you are not required to collect sales tax on items sold to someone in a state in which you have no connection. Caution: In an effort to step up collections, states are taking an increasingly strict view of what constitutes a connection with a state; even the slightest connection can activate your collection responsibility in that state.

Trade shows.You usually must collect tax on sales you make at trade shows. But frequent attendance at shows within a state may create a nexus, requiring you to collect tax on all sales made to buyers within the state (including your online sales), and not merely those at the trade shows. Contact the state in which you will be exhibiting to obtain a sales tax permit (some localities issue a temporary permit) and find out state rules on paying over collected taxes to the state (as well as filing required returns). Caution: While the law in most states is unsettled, a few states, such as Texas, view trade show participation as creating a nexus that can even subject the exhibitor to state franchise tax.

Minimizing sales tax exposure

Even if you are in a state subject to sales tax, minimize your exposure by checking whether:

  • The item is exempt from sales tax. Exemptions vary significantly from state to state (e.g., industrial machinery is exempt from Iowa sales tax; equipment replacement parts are exempt in Kansas). Key items to check for possible exemptions: agricultural products, clothing, computer software, food, leases and rentals, machinery, medical devices and periodicals.
  • Shipping and handling are exempt from sales tax. Usually both shipping and handling charges are included in the basis for figuring sales tax, but one or both may be exempt in certain cases (e.g., in Missouri, each is exempt if they are both optional and separately stated).

    Does your stae subscribe to the Streamlined Sales and Use Tax Agreement (SSUTA)? This pact to simplify and harmonize sales tax codes to ease the burden of collection on sellers has already been adopted in 40 states and the District of Columbia.

    For example, in Ohio, starting January 1, 2004, the sales tax rate is fixed by the buyer’s location, not the seller’s location, within the state.

    Some large e-tailers have already obtained amnesty agreements from states – they will not woe back taxes but have agreed to collect tax on online sales from now on.

    For more information about you state’s rules covering your responsibility for collecting sales tax on e-sales, contact your state tax or revenue department.

    Internet Tax Nondiscrimination Act

    The Internet Tax Nondiscrimination Act, a bill pending n Congress, would permanently bar states from taxing Internet access (such as monthly AOL fees); a temporary ban expired on November 1, 2003. This bill would have no impact on a state’s right to impose sales tax on online sales of goods and services.

    For details, see H.R. 49 at http://thomas.loc.gov.

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