What’s the Deal With Online Sales Tax?

What to Know as a Small Business & Online Retailer

Many businesses have flocked to the Internet as an avenue for an even greater revenue stream. Everyone from handmade craft makers to widely recognized brands, like Staples, have tapped into this method – and for good reason! When done correctly, it works. It works well. With the right eCommerce website design, a company can reach visitors across the nation and promote its products to a larger audience 24/7.

So, you’ve got this great service, an awesome website and a number of customers lined up. Fantastic, but have you covered all your financial bases? One of the most important components to factor into the equation is online sales tax. It’s best to tackle this beast early and not leave it as a costly afterthought.

Holbrook & Manter looks to shed some light on the subject to help prepare you for a prosperous future on the web.

Determining Your Sales Tax Rate

The majority of small business owners are required to implement a sales tax, gather it from the consumer and push those funds to the appropriate authority within a specified amount of time – usually monthly or quarterly. This tax is to be imposed at the point of purchase and paid for by the purchaser. Simple, right? Not always.

Sales tax varies from state to state, which is where things get a bit cloudy.  Across the nation, there is a seemingly infinite amount of differing figures. Which do you choose from? What rate keeps you within legal requirements? Luckily for small businesses, many online shopping carts now offer a built-in option to determine what sales tax rate should be applied. Just when the Internet starts to make things more confusing, it swoops back in to save the day. Moving forward, in some states a “sales tax permit” may be required to even begin charging for sales tax.

Sales Tax ExemptionsDetermining Tax Exemptions & Rates for Online Purchases

As noted above, the presence of a physical structure – or Nexus – in a particular state requires you to implement that state’s tax rate to online purchases. A physical presence is defined by having one of the following: a warehouse, storefront, office or sales representative in the state. Circumstances surrounding the semantics of “physical presence” can get confusing. What happens if you operate a business in California, but sell something to a location in Ohio – a place where you have zero presence? You are not required to collect taxes. However, the moment you sell your product or service to a purchaser in state, you must collect sales tax at the previously-established rate.

Some states do not impose these taxes on general goods and services, so if you’re shipping to these states, the tax can be avoided. These states include:

  • Alaska
  • Delaware
  • Hawaii
  • Montana
  • New Hampshire
  • Oregon

Certain types of products lend themselves to sales tax exemption. If you’re producing raw materials meant to be used for further production of a product, your wholesale materials will not be taxed. If your organization is a non-profit, any purchases will be exempt from taxation. Retailers and re-sellers are often exempt from sales tax, but some restrictions apply here. This is the same for food products. It is best to have a conversation with a professional accountant to help protect yourself from any legal penalty.

For more information regarding online sales taxation, contact Holbrook & Manter’s Business Services and Solutions Team today.