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AN UPDATE ON INTERNET TAXATION
by: Cary Christian


Many major retailers, including companies like Wal-Mart, Target, Marshall Fields and Toys R Us, have already begun collecting sales tax on their online sales. The responsibility for collecting sales taxes is coming soon for you, the small business owner, as well.

Much relief accompanied the extension of the moratorium on Internet taxation when it occurred late last year (The Internet Tax Freedom Act), but most people did not realize that the moratorium only applied to taxation of consumers on the use of Internet Service Providers. Not a big deal!

The states have been working on the "Streamlined Sales Tax Project" for some time now. The final agreement was released on November 12, 2002 and here is how the states are lining up:

o 34 states have already adopted legislation,
o 2 others have introduced legislation,
o 1 is a member of the consortium but hasn't introduced legislation yet,
o 5 are "observing",
o 5 have no sales tax provisions and will, therefore, not participate, and
o only 3 states that have sales tax provisions are not planning to participate.

There is more than enough participation from the states already for these rules to become a reality. Even though it will require some help from Congress to become workable law across state borders, it's coming, and it's coming soon!


HOW WILL IT WORK?

I wrote an article about a year ago talking about what a mess imposing sales taxes on Internet transactions could be. This agreement provides a workable framework that would eliminate many of those problems. It really should come as no surprise. The states knew that in order to entice Congress and large retail associations to buy into such a plan, it would have to address the more nightmarish aspects of the current system.

The purpose of the agreement is to streamline and provide some uniformity to the overly complex state and local sales tax provisions currently in place in more than 7,500 separate jurisdictions. The agreement provides rules covering the determination of what items are taxable, what items are exempt, how the states are to provide this information to sellers and how sales will be sourced among the various states.

The agreement will not mean that the taxable items will be the same from state to state. They will not. Each state can still provide exemptions for specific categories of products. Data on taxable items and applicable tax rates will be available as a downloadable database that contains the combined data for all states that are a party to the agreement.

I think it's fair to say that the agreement provides uniformity in administration only. It does not attempt to replace the separate state's sales tax systems with a new, uniform, nationwide law. It does attempt to introduce simplification by making member states conform their laws to the administrative framework provided by the agreement.

The agreement provides for a single online registration to collect sales taxes for all states that are members, so you won't have to register with individual states.

Large companies have been dealing with the difficulties of complying with multi-jurisdictional sales tax for many years. They have sophisticated systems in place to handle the task. This new sales tax framework will not be difficult for them to implement.

It's an entirely different story for small business.

For every sale you make you are going to have to determine which state's sales tax law applies to that transaction. If the purchaser provides you with a shipping address, that address will determine the state tax rules to be used.

If your customer picks up the product at your location, you will use YOUR address to source the sale.

You can also use information obtained during the consummation of the sale transaction such as the address of the payment instrument used to make the purchase.

If none of the above are available, use the location the product was shipped FROM.

Can your current system handle these sourcing rules? You'll have to receive certification from the governing board of this coalition of states in order to use it. The technical term is "Certified Automated System" or "CAS."

If you choose not to use your own system, you can use the services of a "Certified Service Provider" ("CSP") who will take care of all the tax collection and reporting duties for you. The CSP, of course, must be using "Certified Automated Systems" that can be integrated into your sales process.

The CSP route would appear to be the easiest way to go for the vast majority of small businesses. What is not clear is whether or not these CSPs will be allowed to charge you for their services. They will be receiving payment from the states in the form of a percentage of the tax they collect, so it is possible they will be prohibited from also charging the business for their service. If they are so prohibited, it is almost a no-brainer that you should use their services. For all the talk of uniformity and simplification, maintaining the infrastructure to support collecting and remitting these taxes properly will be a very complicated process.

An important note to include here is that the agreement provides a framework for sourcing the sale of digital goods, such as software and ebooks. This means that even the smallest of home businesses can be subject to collecting and remitting sales tax to a number of separate jurisdictions.

Those of you who live outside the US are also going to be responsible for collecting tax on items sold into the US.

Under existing law, the courts have held that a state could only hold you responsible for collecting and remitting sales tax if you had "nexus" within that state, meaning you had a brick and mortar business establishment there. This new agreement is designed to bypass such restrictions. If you make a sale that is sourced to a particular state in the US under the rules laid out in this agreement, you have the responsibility to collect and remit the tax regardless of where you are located.


THE EFFECT OF THIS AGREEMENT ON SMALL BUSINESS

Assuming most small businesses are going to be using Certified Service Providers to handle their sales tax activities, I would suggest that this agreement will have little impact. I foresee merchant account providers, companies that sell shopping carts and storefronts, and even businesses like PayPal and ClickBank providing these services at no additional cost to you. If the collection and remittance of the tax is taken care of for you, and you're not paying one red cent more for the service, the effect of taxation becomes transparent to you.

Will it make a difference to your customers? Doubtful. Since the taxation will apply to all businesses equally, it does not appear that anyone gains any specific competitive advantage.

There is one major caveat, however: if there is no methodology to enforce these rules with respect to companies selling from outside the US to consumers inside the US, US businesses will suffer a disadvantage. Nothing in the agreement speaks to this issue. We'll have to wait and see how it is dealt with.
 


Copyright (c) 2003

 


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