HOW DOES SALES TAX WORK?

Sales tax is a tricky issue for ecommerce merchants. This lesson will endeavor to familiarize you with sales tax theory and practice for online sales.

The Theory

As an online vendor, you are legally required to comply with the sales tax laws for each locality in which you make sales.

You may hear or read that sales tax laws do not apply to online sales, but this is not true. The sales tax laws do not excuse online vendors from paying sales tax.

The Problem

After reading the last section of this lesson, you may be scratching your head and wondering how in the world you'll be able to collect and pay sales taxes to the thousands of localities which require you to collect sales taxes.

Fortunately, the Supreme Court was just as puzzled.

In 1992 they ruled that requiring online merchants to pay sales taxes to each locality imposed an undue burden.

Here's the twist - the supreme court didn't remove a merchant's obligation to comply, but simply called it "unenforceable".

The Reality

In practice, most internet merchants simply collect and pay sales tax when a purchase is made to someone in their own state or locality. This simplifies things quite nicely for the merchant. You should ensure that whatever shopping cart you choose has the ability to charge sales tax when the sale is made to someone from your local tax area.

The Future

To simplify things, and thus to make the law enforceable, several states have banded together to develop new technology which will allow ecommerce merchants to easily calculate and pay local sales taxes. Once this technology is available, the law once again becomes "enforceable".

It appears that this point has now been reached. There are currently three companies which provide sales tax calculation software which plugs into compatible shopping carts: Avalara, Taxware and Exactor all provide tax calculation tools.

Where this leaves your particular business is murky. We encourage you to consult a knowledgeable Ecommerce attorney.