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Saturday, July 4, 2009

Sales Tax and E-Commerce

Currently companies are only required to collect sales tax within a state if they have a physical presence there. This is called Nexus. This is why non-California customers don't pay sales tax. California residences pay the sales tax for where I ship from (Rowland Heights), not for their actual location since ChildBook does not have operations within other states.

Theoretically, the person receiving items is supposed to voluntarily pay the sales tax within their state. For businesses, since they do get audited for sales tax compliance they prefer to work with firms that charge sales tax for commercial transactions. Examples of companies that do are PC Mall and CDW.

New York is trying to get sales taxes from Amazon by claiming that affiliates are acting as sales agents for Amazon, and therefore Amazon has a physical presence there. Amazon so far has lost this in court. What another company did was just eliminate affiliates in New York.

A sticky issue is how much activity represents nexus? Would a tradeshow in a state be potentially nexus? If they took orders at the trade show, yes, if they waited till they got back to their home office probably not. Court cases have varied on what constitutes nexus. Would mailing catalogs to a state be nexus? No, because it's not enough physical presence per the US Supreme Court. The reason behind the tax issue is the Commerce Clause in the Constitution, and with there being thousands of different sales tax rates in the US per the Supreme Court considered to be burdensome for retailers to collect sales tax for out of state purchases. Congress can legislate changes in the collection of sales tax, but so far has not.

In the future I believe sales taxes will be collected. With computers and databases, the issue of complexity is a non-issue. There is also a movement called the Streamlined Sales Tax Project to simplify the number of sales taxes across the US

References:
Please note, I am not a CPA and the above is informational only and please consult with a professional before making any business decisions on charging and not charging sales tax.

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