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
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
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
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
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
If none of the above are available, use the location the product was shipped
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
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
Copyright (c) 2003