State and Local Tax Issues Cause A Virtual Headache for Business Owners
How much business do you do online? Whether we’re talking a few sales here and there or a full-blown contract with Amazon that allows you to ship merchandise daily to customers across the country, every sale you make online is potentially subject to a sales tax. That means that the states in which you do business will soon be knocking on your door in search of the money you so graciously put aside for them. (Umm, you did put money aside for them, right?)
Read Also: Possible State Tax Implications for your Business
Unfortunately, when talking state and local tax (SALT), nothing is really ever simple …
In the United States, sales taxes are governed on a state-by-state basis, which means that each state plays by its own rules when it comes to tax rates, how sales are sourced, and even the definitions (did you know bottled water is considered food in some states but not others?). Needless to say, managing these various laws can get tricky.
Here are some things to keep in mind if you conduct any measure of business online.
Online Sales Tax In A Nutshell
As an online retailer, collection of sales tax is mandatory on products that are sold to consumers who are located in states where the following conditions are met.
- The sale is sourced to the state – usually this is where your customer first took possession of the product in that state.
- The seller has nexus with that state – Nexus refers to a business having significant connection to the state to make the imposition of a sales tax collection burden fair. A business will always have nexus in its home state, but nexus can be established in other ways, including how much you sell in a particular state and where your inventory in stored. The current rule is that you must some kind of physical presence in a state (even for a day) but efforts are underway to change that to simply having $X of sales in a state.
- The item in question is required to be taxed – Nearly all tangible products sold are subject to sales tax, although some are exempt based on what the product is – like food sold at supermarkets.
- The person buying the item is NOT exempt – Most states have sales tax exemptions for a variety of activities depending on how you intend to use the item. For instance, if you buy a hammer, they may or may not be taxable depending on how you plan to use it!
Possible Consequences Of Not Paying Sales Taxes
As you can expect, conducting business online and in states that require businesses to charge and remit sales tax means business owners have yet another responsibility to balance – and it’s not one that can be easily pushed aside. Failure to properly charge, collect and settle the taxes with the taxing authority could result in harsh penalties, including:
- Back Taxes – States can hold you, the seller, responsible for back sales taxes. Sometimes you can collect these from your customers, but most of the time you end up having to pay this. It’s dangerous – an unexpected 7-10% of your gross receipts in back sales tax over 6+ years can put your company under.
- Interest and Penalties – These can add an additional 20% of the back taxes amount.
- Other tax types – All too often a sales tax issue can expand into an income, franchise, or gross receipts tax audit in a state. You may be held responsible for back taxes, interest, and penalties here too.
Selling products online brings on many taxation questions. Without the proper understanding of SALT issues, you may end up with an expensive tax bill. Email Rea & Associates today to talk to a member of our SALT services team.
By Joseph Popp, JD, LLM (Dublin Office)
Check out these other great state and local tax resources:
The State Tax Response To Federal Tax Reform | Podcast
What The South Dakota v. Wayfair Means To Ohio-Based Businesses