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If your company sells items online, some of your customers may owe sales taxes on their purchases. Whether you need to collect sales tax depends on where both you and your customers are located. If your customers are in the same state as the physical location of your business, then they will owe sales tax on items they purchased from you. You are responsible for collecting sales tax and sending it to the appropriate state taxing agency. For example, if your store is located in Florida and you sell online to someone who also lives in Florida then you need to collect sales tax from that customer. This is true even if the item is being shipped from a warehouse in another state.

Some large retailers that have store locations in most states have gotten around the same-state sales tax requirement by setting up separate companies for their online businesses.

Customers Located in Other States

Currently, you do not need to collect taxes from customers who are located in a state where you do not have some type of physical presence, such as a store, office or warehouse. This is due to a 1992 decision from the United States Supreme Court (Quill v. North Dakota) that exempted out-of-state retailers from collecting sales taxes in states where they have no physical presence (the legal term for this physical presence is "nexus"). This ruling has been found to cover all remote sellers, including online retailers, even though the actual case was about a mail order company.

The Court cited the burden of requiring these companies to comply with the regulations of some 7,500 different local taxing jurisdictions and the resulting adverse impact on interstate commerce. The Court noted that Congress has the authority to change this policy by enacting legislation requiring all retailers to collect sales taxes, which Congress has not yet done.

Use Tax

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet company doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as an "use" tax rather than a sales tax.

The only difference between sales and use tax is which person pays the state; sellers pay sales tax and buyers pay use tax. Use taxes are really just a backup plan to make sure that the state collects revenue on every taxable item that is purchased within its borders.

If you buy something for business use, such as a computer and your vendor didn't charge you sales tax on it, you are required to figure out the use tax and pay it to your state. Taxing authorities don't have a way of making sure that you are paying any use tax but this is something that an auditor would check.

National Internet Sales Tax

The tax-free advantage of selling and buying over the Internet may be over soon. Some states and retailers are pushing hard for a national Internet sales tax. States claim they're being deprived of millions of dollars of tax revenue, while offline retailers say their online competitors have an unfair advantage.

For now, all you need to worry about is collecting sales tax from customers located in the same states as your locations. If an Internet-wide tax bill is passed, you may want to come up with other ways to entice your customers to make online purchases, such as offering an equivalent discount, free shipping, or free gifts.

Recent Events

In 2008, New York became the first state to extend its definition of nexus to cover some Web-only retailers, including Amazon.com. The legislature passed a bill which states that Web retailers, who have a nexus in New York, must collect sales taxes if they have sales affiliates in the state who generate a combined total of $10,000 a year or more in revenue for the retailer.

Question For Your Attorney

• Will I be notified if a National Internet Sales Tax passes?
• If I owe use tax, how can I figure out how much I owe?
• I'm located in New York and I have business online. How does this 2008 New York law affect me?

Related Resources on Lawyers.com^sm

- Response to IRS Notice
- File your taxes online
- Business Taxes
- Tax Issues and Your Small Business
- Please visit our Mail Order & Internet Purchase Message Board for more help