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Why Small Businesses Should Stay On Top of the Internet Sales Tax Movement
Published on Apr 5, 2013
Check out 'Why Small Businesses Should Stay On Top of the Internet Sales Tax Movement' at 'Time to Start Up,' the small business blog by BizFilings.
Over the last several years, the Internet has allowed for a variety of business opportunities, whether you want to find incorporation information online, or actually register a company. Small businesses have taken advantage of the Internet as a means to broaden their customer base and sell products to consumers that may be located a thousand miles away. While the Internet has enabled significant opportunities for small businesses and online corporations, state governments, and the federal government, in some respects, are starting to chip away at these opportunities through various sales tax regulations.
Currently, a company that does not have a physical presence in a specific state, such as a store or warehouse, is not required to collect sales tax directly from its customers in that state. Rather, the consumer is expected to pay the state sales tax. This “nexus,” as it is called, was provided for by the U.S. Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992).
Of course, believing that consumers will voluntarily pay what is euphemistically called a “use” tax to their state of domicile is crazy. The state governments know this, and typically only “chase” the tax paid by consumers on high-dollar items, like cars or boats.
In addition, big-box retailers have gotten around this by creating a separate online subsidiary. For example, a Best Buy that sells products online has a different sales tax than the Best Buy that has a physical presence. Besides sidestepping the taxing authorities, big-box retailers have also mobilized brick-and-mortar retailers, who must also collect tax.
It May Get Complicated for Small Businesses
Tax starts to get complicated in these three areas:
Some states, like Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon, do not have a sales tax.
Other states, like Florida, are exploring ways to start holding companies that do not have a “nexus” inside their borders accountable. The state estimates that it loses $454 million a year in sales tax revenue on goods bought from Internet-only vendors.
States charge sales tax on some product and service categories and not others, such as food or clothing.
It’s important to be aware of the change that’s coming. In early 2013, lawmakers introduced the Marketplace Fairness Act, which would provide states with the authority to require out-of-state retailers to collect sales tax. Two dozen states have passed legislation to support the collection process.
An Action Plan
With legislation shifting, it’s critical that small business owners educate themselves around what these tax changes could mean for their business. There’s no bigger headache than bumping heads with the IRS when it comes to tax issues, so staying on top of new legislation is the best possible way to ensure that the actions you take are smart business decisions.
For entrepreneurs that already sell products and services across state lines, following this issue very closely is important, but hiring a consultant, or other service, that specializes in sales tax regulations will help eliminate future risks.
Additionally, entrepreneurs that don’t sell products and services across state lines may want to hold off doing so, or at least implement a strategy around what classes of products and services they will sell, and in which states.
Closely following organizations including the Electronic Retailing Association and the National Retail Federation (NRF) are a great way to stay apprised of developments on sales tax issues. This way when new legislation comes into play or regulations change across different states, small business owners won’t miss a beat.