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.
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