Your Business Incorporation Filing: Web Business and Sales Tax
by: Jade Roberts
Thinking abou a business incorporation filing for a web based business and wondered about sales tax? If you’re a chronic web shopper like me, you have been hooked by on-line retailers with the allure of tax free shopping. But, you have probably noticed that some sites charge you sales tax while others do not.
As a business owner, whether or not you have to collect sales tax from a customer depends on if you have a presence in their state. If you do not have a physical presence in the customer’s state then you are not required to collect sales tax. For example, you complete your business filing and set up a store in Texas. You are only required to collect sales tax from your Texas internet customers. Physical presence doesn’t just mean store. A physical presence can be store, business office or warehouse. If you complete you business filing, open your store in Texas but also have a warehouse in Arizona, you must collect sales tax from both your internet customers in Texas and Arizona.
In 1992, the Supreme Court ruled that mail-order merchants did not need to collect taxes for sales in states where they did not have a physical presence. Large retailers used to circumvent the law and not collect taxes on any of their internet sales by setting up legal but separate subsidiaries to handle all of their internet sales. Lawsuits from several states that were unhappy with the loss of sales tax put a stop to this practice.
If you are completing a business incorporation filing, do you have to be concerned at all about collecting sales tax from customers in states where you do not have a presence? The answer is no. If a consumer lives in a state that collects sales tax (there are five that don’t Alaska, Delaware, Montana, New Hampshire and Oregon) they are technically required to pay the sales to the state on their own if the merchant does not collect. This is referred to as a “use” tax. Where sales tax is collected on a purchase by the seller and paid to the state, use tax is paid directly to the state from the buyer. Typically, states don’t sweat the use tax on smaller purchases it is too difficult to track and collect. States do attempt to collect use tax on large ticket items like those requiring licenses such as cars or boats.
There is much speculation on the future of tax free shopping on the internet. There is a quite a bit of opposition to the current law by brick-and-mortar merchants and some state governments. Sales tax revenues amount to $150 billion annually and make up roughly a third of all state revenue. Some states have already made the push to collect use tax on smaller purchases. New York now has a line on their state income tax return form that requires New Yorkers to calculate how much they should pay on internet, mail-order, or out of state purchases. California has also begun a campaign to educate tax payers on use tax. If you are business filing for your web business, go ahead and hook us chronic web shoppers with the promise of no-tax shopping while you can. But, know if the state governments have their way you may have to alter your hook.
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