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When to Collect Sales Tax on Internet Sales?

July 18, 2019

When Do You Need to Collect Sales Tax on Internet Sales?

In the “good old days” of remote selling on the internet, you did not need to worry about having to collect sales tax on what you sold. Those “good old days” ended in 2018! Although today, only a dozen or so states have sales tax collection as well as notice and reporting requirements, there will soon be standardized legislation that will be up for votes in virtually every state! What started as little waves washing ashore from Colorado and South Dakota cases before the U.S. Supreme Court is turning into a tsunami that will wash across every state. So, as the world of remote selling changes, when do you need to collect sales tax on internet sales and what else will you have to do? This article provides a few of the basics. If you want to be prepared, contact us at Exigo Business Solutions in the Kansas City area.

Your Obligation to Collect Sales Tax on Remote Sales
Your Obligation to Collect Sales Tax on Remote Sales

Your Obligation to Collect Sales Tax on Remote Sales

State laws that require remote sellers to collect sales tax rely on a concept called “nexus” which implies a relationship between the seller and the state. The old concept was that you had nexus in a state if you had a store in the state, an office there, a warehouse, a distribution center, or simply sold goods at a yearly trade show. But, the concept has been expanded due to a case that South Dakota won before the U.S. Supreme Court. Now, you can have “economic nexus” if your sales in the state pass a set number or pass a set dollar amount. In general, when your number of sales or dollar amount pass the limit set by a state you will need to begin collecting sales tax for the rest of that year and begin the next year collecting sales tax on every sale.

For the time being, only a minority of states have such requirements but this is sure to change. Our suggestion at Exigo Business Solutions is to get ready now. If you track your sales with QuickBooks or whatever accounting software, you will want to make modifications to alert your when sales pass the “magic” numbers for any given state so that you can start collecting (and passing on to the state taxing authority).

We originally asked, when do you need to collect sales tax on internet sales? The problem will be that this will vary state by state and as more states come on line with these laws, there will be more requirements and more variations. Work with someone who understands these laws and how do deal with them. Work with someone who can help you upgrade your bookkeeping and accounting systems so that you handle this issue as efficiently and cost-effectively as possible.

What Else Is in Store Besides Collecting Sales Tax?

States are missing out on sales tax collections because remote sellers offer better deals that local brick and mortar stores. The states will now be able to collect at least some of what they consider to be lost revenue with the new economic nexus laws.  

But, states have always missed out on collecting “use tax.” And, they will still be missing out of sales tax collected by remote sellers who do not pass the thresholds defined by their laws.

Use Tax Notices and Reporting
Use Tax Notices and Reporting

Use Tax Notices and Reporting

The use tax is a tax on the use, consumption, or storage of a taxable item or a service in the case where no sales tax was paid. It is not charged if a sales tax was paid.

The use tax has to with purchases made outside the state taxing jurisdiction but which are used within the state. It can also apply to items that were originally exempt from tax but came to be used in a “taxable manner.”

(Sales Tax Institute)

The other “tsunami” heading your way has nothing to do with economic or physical nexus. It simply requires that you make sales in a state. The first issue is that when state law requires it, you will need to notify your customer with a notice on your invoice that they may have a tax liability for sales or use tax from the purchase they are making from you. This will apply to every customer from whom you did not collect a sales tax.  

Then, at the end of the year, you will need to send a report to each customer reminding them of what they purchased and how they owe sales or perhaps use tax to their state taxing authority

And, last of all, at the end of each year you will need to send a list of all customers from whom you did not collect sales tax. This goes to the state taxing authority and will contain names, purchases, dollar amounts, and addresses of your customers.

You will need to do this for all states where the law applies and you will need to work with someone like Exigo Business Solutions in the Kansas City area where we keep track of where these laws apply.

Knowing when you need to collect sales tax on internet sales, when you need to notify your customers of their tax obligations, and when you need to report sales to the state will be a challenge as new states adopt these laws. Then it will be an issue setting up your accounting software to effectively keep track of everything.

In the end, what the states want is for you to simply collect sales tax on all sales and remit the money to them. That will give them the money that you want and perhaps make your life easier. This could be a realistic choice but should be made with the advice and counsel of a smart accountant. Contact us for help in this matter.

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