Online sales tax laws can be very confusing for both first time merchants and well established eBusinesses. Laws are always changing, being reviewed and depending on the country, state, county or city you are in, tax requirements may be different. Knowing about Online tax law and tax requirements is certainly something worth knowing and keeping current on before jumping into the eCommerce world.
U.S. Online tax requirements are generally the same across the board, but can be different for merchants who sell goods from those who sell services and those who sell both. There may also be special circumstances and depending on whether you sell solely Online or whether you use a combination of Online and Physical storefront selling there may be additional laws that affect the taxes you are required to collect or pay out.
Sales Tax for Selling Goods Online:
The U.S. is one of the only countries that relies heavily on charging sales taxes for national tax revenue. There are as many as 7500+ different sales tax jurisdictions in the U.S., many of which apply to sale of goods.
Sales Tax for Selling Services Online:
Sales tax on services have never been as widely relied upon in the U.S. as the tax on sales of goods. However, sales taxes on services are widely debated since Internet access, Internet advertising and transactions related to web site space all are service transactions that previously were non-existent in commerce. This essentially means that these new services could provide new sources of sales tax revenue that previously have not been available to revenuers.
Sales Tax for Buying Goods or Services Online:
Consumers often don’t realize that just because sellers do not collect taxes on eCommerce purchases outside their home state does not mean you don’t still owe the sales taxes. YOU DO. We will go into this more in another QandA post or article.
Online Sales Tax Then & Now:
Nexus is a seller’s minimum level of physical presence within a state that permits the taxing authority to require the seller to register, collect and remit sales/use tax and comply with the Country’s, State’s and/or County’s taxing regulations and requirements.
In 1967, Supreme Court officials ruled that when a seller’s only nexus with a state was through deliveries of goods to an address in that state, the seller was not subject to that state’s sales tax requirements. Meaning, sellers who market across the country through print catalogs, and now through electronic means, are protected from any obligation to collect and remit sales or use taxes, EXCEPT on transactions delivered in the seller’s state. Many retailers, who sell the same goods but must collect the taxes from their customers, widely object that this creates an unfair competitive advantage for direct marketers. Nevertheless, the ruling was again reaffirmed by the Supreme Court in 1992.
Once the Supreme Court reaffirmed the nexus in 1992, most merchants that also operate print catalog or online distribution channels maintained those direct marketing operations as a separate legal entity. Using separate entities enables the direct marketing operation, to avoid any nexus with any sister stores, so the entity does not have to charge sales taxes, EXCEPT in the state where it operates a distribution center.
In October 1998, the Internet Tax Freedom Act, which imposes a national, three-year moratorium on any new Internet taxes went into effect. The statute also established an Advisory Commission on Electronic Commerce to examine all the interests at stake in the Online tax landscape. The commission was charged to advise congress on whether eCommerce should be taxed, and if so, how, without creating multiple and discriminating taxes.
In October, 2001, Congress permitted the moratorium to expire, but soon thereafter extended it for another two years. In November, 2003, the moratorium expired again and was re-upped until 2007.
Merging Online & Physical Retail Entities:
Recently, many major Online merchants including Walmart, ToysRUs and Target all started collecting state sales taxes on all internet transactions when the purchaser’s home state imposes sales tax. The move comes as Walmart, ToysRUs, Target and others strive to integrate their Online and physical retail operations, with services such as Online purchasing and in-store pickups or returns. Once the eCommerce and retail operations start merging functions, the Online organization would likely be deemed to have nexus in all the states where the retailer operated, regardless of any separate legal status that might exist because the Online operator is a separate subsidiary.
Online Sales Tax Outside The United States:
eCommerce tax laws in the U.S. are typically different than in other countries. Many countries (other than the U.S.) use a value added tax (VAT) system, which I will briefly discuss below.
To understand VAT better, you should also know a little bit of the tax lingo and terminology:
Output VAT: The amount received by a seller as a percentage of the gross sale price or goods or services.
Input VAT: The amount paid by a buyer as a percentage of the gross purchase price for goods services used in production.
Supply Location: If goods or services are supplied from a VAT jurisdiction, the transaction is subject to VAT and the supplier must collect it at the time of purchase (Buyers in VAT jurisdictions who buy from non-VAT sellers, may still owe input VAT).
Transport Location: If goods are to be delivered, place of supply is the place where transport begins. This affects non-Vat sellers (such as U.S. merchants) that dropship goods from sources within VAT jurisdictions.
Zero Rated: Transactions in which the seller collects no output tax and the and the corresponding input tax is fully refundable (exports counts as zero rated).
Exempt: Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller (financial services generally count as exempt).
How to Calculate VAT:
VAT taxpayers relate total output VAT (sales amounts received from buyers) to their total input VAT (purchase amounts paid to sellers).
When total output VAT exceeds total input VAT the difference is paid to the taxing jurisdiction.
When total input VAT exceeds total output VAT the taxpayer is entitled to a refund.
Input VAT paid towards goods and services eventually sold in exempt transactions are not included in the VAT calculation.