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Sales Tax, Use Tax and Internet Transactions
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| Tax
Nexus |
Electronic commerce implies collecting and paying
sales tax. But sales tax laws vary not only from state to state
but even among counties, towns, transit districts and other taxing
authorities. How does an online merchant comply with this variety
of tax responsibility?
Sales tax cannot be assessed in a jurisdiction if the seller
does not have substantial physical presence in the jurisdiction.
Presence for tax purposes is called tax nexus. If your company
has offices in Texas, for example, you have nexus in Texas and
are responsible for collecting sales taxes for goods shipped to
customers in Texas. This applies whether those goods happen to
be physical goods or electronic bits.
If your company has contracted with a sales agent in another
state, you are considered to have tax nexus in that other state.
However, the fact that you ship goods via the post office, UPS
or FedEx to other states where they have presence does NOT mean
that you have nexus in those other states. Simply using a shipping
service does not constitute nexus. Similarly, if your Internet
Service Provider stores your Web pages on a server that is physically
located in another state does NOT mean that you have nexus in
that other state. If you send catalogs to another state (i.e.,
physical paper catalogs), you do NOT have tax nexus in that state,
so the availability of an online catalog does NOT establish tax
nexus for your company in that other state.
In short, tax laws and nexus for electronic commerce work in
pretty much the same way as they would for a mail order business
which takes orders over the telephone. One main difference, however,
is that when mailing a physical product, the merchant obviously
knows the shipping address of the buyer. Not so with electronic
products...the merchant only need know and IP address or email
address. Of course, the merchant can ask for an address but there
isn't the same automatic connection between address and location
as with physical goods (in other words, the buyer could lie to
avoid paying sales tax.) |
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| Use
Tax |
So, you think you have a way to avoid paying (or charging)
sales tax--just order from a company that does not have nexus in
your state. While this was common a few years ago, it is no longer
so. Today most states have use taxes which are the same idea as
sales taxes but which do not require nexus. The rates for use tax
may be the same or different as sales taxes.
What this boils down to is that if you're selling across the
Net, you need a large table of regions and applicable taxes. |
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| Which
Taxes? |
If you have tax nexus in a state, what taxes must
you pay? Certainly, state sales tax. But there are also counties,
towns, transit districts and other taxing authorities that must
be considered. And if you don't have nexus, you have to pay use
tax for all those same taxing authorities. It has become very complex.
A niche software industry has been created simply to track sales
and use tax responsibilities of companies selling in the U.S. These
packages are primarily indexed by Zip code but in many cases multiple
tax authorities imposing different tax burdens cross a single Zip
code. The software is typically updated monthly in an effort to
keep up with all the sales taxes in all the jurisdictions throughout
the United States.
The industry is just beginning to comprehend sales taxes outside
the United States. Selling products across national borders often
requires the computation of Value Added Taxes (VAT). At the time
of this writing (May, 1997) no software exists for the Net which
computes VAT but companies have announced its imminent release.
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| Practice
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The current state of practice of tax computation on
the Net varies. The best companies calculate applicable taxes in
real time and add it to the customer's bill before he commits to
the purchase. Other sites do not calculate taxes in real time but
notify customers that appropriate tax will be added to the bill
prior to settlement. These companies are generally selling hard
goods which need to be shipped making the real time requirement
for credit card purchase authorization slightly less critical. A
third practice seen on the Net is to not even mention taxes but
add it on to the bill prior to settlement. Although not uncommon,
it is not recommended--it is misleading.
The reason for this uneven practice of dealing with sales taxes
across Web sites is due to complexity and cost. If a company has
only one presence, it need only calculate sales taxes for orders
from that state and use taxes from everywhere else. But companies
that have a chain of retail outlets in addition to their mail
and Web order business must calculate sales taxes for orders from
all locations in which they have retail outlets and use taxes
from other places...which may be quite complex.
Today, sales tax software is expensive...over $20,000. Many
merchant companies are reluctant to spend that much on such a
small part of their Web site. In addition, if they have an existing
mail order business independent of the Web, they may already be
paying for similar software, but which does not yet interface
to their Web site. Many companies are finding work-arounds until
the software is more in line with expected returns from online
sales.
©1997, Harry Tennant & Associates |
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