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Need To Know: About the Internet Sales Tax

Posted on 4.12.2006

Have a conversation with any professional e-merchant these days and you may end up discussing (or arguing) the concept of an Internet sales tax. A tax for those selling goods and services online has been a hot topic since the Web’s commercial inception. So what is the answer? Do you have to charge and collect sales tax on orders placed over the Web or what?

The answer for the e-commerce industry at this point in time is yes and no. The chances are  increasingly good however that you will definitely have to in the future. But a serious problem remains in that no one can really figure out a fair, logical and comprehensive solution to the ‘Net taxation process — and that includes merchants and the government.

The Bottom Line:
Generally, when you’re selling goods or services online you need to charge sales tax if the buyer is located in the same state as you. Under current law, you’re not supposed to charge sales tax to buyers who live in other states. A company in California, for instance, does not collect sales taxes when shipping to Maine.

When you buy an item online or from a catalog retailer based in another state, you probably noticed that the retailer doesn’t have to collect the sales tax that is due in your home state. If the seller has an office, warehouse, distribution facility or retail location in your state however, the seller may have to charge you sales tax because he is legally “doing business” in your state.

The Law in Action:
Legislation introduced in December 2005 by Wyoming Senator Mike Enzi proposed significant changes to how Americans are taxed for online purchases. The bill, called the Sales Tax Fairness and Simplification Act, applied only to businesses with more than $5 million in “gross remote taxable sales” each year, and would have only affected shipments sent to participating states. Many states signed on and others are heading in that direction.

Organizations such as the SSTP (The Streamlined Sales Tax Project — streamlinedsalestax.org) are trying to simplify state and local tax collection by establishing a system in which e-commerce companies can voluntarily pay state taxes to the states in which their customers reside. If the SSTP ever passes Congress, then Internet sellers of all kinds will be required to charge state and local sales taxes at the rates in effect wherever their buyers are located.

Bills concerning an Internet sales tax are frequently proposed but often fail, in part because e-commerce companies point to a significant potential increase in compliance burdens. The United States Supreme Court has previously exempted most Internet and mail order firms from collecting state and local sales taxes, citing its adverse impact on interstate commerce.

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