There was good news for entrepreneurs last week, as Congress passed a seven-year moratorium on Internet taxes. After all, the Internet has been an amazing platform for the creation of small businesses — but anything, including taxes, that might limit the number of people with Web access could hinder small-business growth.
But don’t be confused. The new law extends a moratorium on access taxes — not sales taxes. In other words, your state can’t start taxing you when you put up a Web site, send out e-mails to your customers or even just sign up to get Internet service. You won’t see the litany of small taxes on your Internet cable or DSL bill as you now see on your phone bill.
It doesn’t change your responsibility for collecting sales tax, whether you do business in the virtual world or the real one. If you already collect sales tax when you sell handmade Windsor chairs, organic-cotton infant’s clothing, or business books (as I do from my Web site) on the Internet, then you still need to keep collecting sales tax.
So when do you need to collect sales tax? It depends on where you’re doing business, what you’re selling and whom you’re selling to.
Question: Does every business have to collect sales tax?
Answer: Sales tax rates and rules vary from state to state, city to city, county to county. States call these taxes by various names including sales tax, franchise tax, transaction privilege tax and use tax.
Q: If I do business in more than one state, do I have to collect taxes?
A: The rule of thumb is that you have to follow the tax rules of any state (and city and county) in which you have a physical presence. But “physical presence” is broadly defined. If you have any location, facility, employee, call center, address, or even one independent sales person in a state, then you have to collect taxes in that state.
Q: Do I charge sales tax if I’m making a sale on the Internet?
A: The rules are the same for Internet sales, catalog sales, telephone sales, and in-person sales. Charge sales tax whenever you deliver the product to a customer in a state where you have a “physical presence.”
Q: How much sales tax do I charge?
A: It depends on where you do business and where your customer lives. Some Web “shopping cart” software for operating an e-commerce Internet site can calculate sales tax rates for you. You can also check The Sales Tax Clearinghouse, www.thestc.com. Click on the link to “state tax rates and DoR webpages” to find a link to a state’s sales tax authority. You can also click on “Lookup Rates” to find the sales tax — state, county, local, etc. — for any address.
Q: What products are subject to sales tax?
A: Each state makes its own rules as to which products or services are taxable. Typically, most products sold to end users are taxable. Major exemptions include:
• Prescription drugs;
• Food, especially groceries and non-prepared food;
• Animal feed, seed and many agricultural products;
• Products for resale, such as raw materials, inventory and any other items that are going to be sold, rather than used, by your customer.
Q: Do I have to charge sales tax if I’m selling a service?
A: Once again, rules vary by state. Many states exempt services. And within a state, the rules can be inconsistent, even crazy.
Q: What kind of paperwork must I deal with?
A: Generally, if you’re going to collect sales tax, you must get a license from your state. On each taxable transaction, you calculate the applicable sales tax, collect it from the buyer, keep tax records and file a tax return and pay the taxes to your state. You’ll pay monthly, quarterly or annually, depending on your level of sales.
One thing’s for certain: If you’re going to be making sales in any state, city or county that has a sales tax — whether those sales are online or in-person — talk to an accountant. You’ll need help to figure this out correctly.
Rhonda Abrams is the author of “Six-Week Start-Up” and “What Business Should I Start?”
