By John Alec Stouras
It would be best to start with a great and bromidic Benjamin Franklin quote: ". . . in this world nothing can be said to be certain, except death and taxes." Suppose you were a purely online business, for a decent while you were exempt from having sales taxes collected because you didn't have a brick and mortar front. But since the Supreme Court of the United States’ South Dakota v. Wayfair Inc decision in 2018, states can put on the book sales tax laws for purely online companies. Things were a bit more obscure in the past, and you often had to have a physical presence in the state in some capacity. These laws contain varying requirements on how much business you do to meet the threshold to have to collect Internet sales tax.
So, just because you have a digital marketplace does not mean states can't take some taxes for the sales. Fear not yet; policymakers have been trying to make sure that Internet Sales Taxes will not punitively affect small businesses like you. Therefore, the requirement you have to meet to be a company that has to collect sales tax is usually a high number of sales or a high number of transactions in each state.
The Bar To Pass
Each state has a different minimum bar if your business must collect sales taxes, and you may have to collect sales tax in some states, and in other states, not at all. The bar for many state Internet sales tax laws usually looks at a couple of things:
· The number of sales in USD (whether it is in gross, net, or taxable)
o Example: California measures by $500,000 intangible personal property for delivery.
· Number of transactions made
o Example: Illinois measures by either $100,000 in gross receipts of tangible personal property OR 200 separate transactions for the sale of tangible personal property.
If a state you are operating in does not have an Internet Sales Tax Law on the books yet, you are not exactly out of the woods. Before the Wayfair decision, you could still have Internet sales taxes collected on businesses that have a physical presence. Examples from the Quill Corp. v. North Dakota Supreme Court ruling show that physical presence means “warehouses, offices, stores, and a sales representative is in the state.” That covers most businesses I know of, so you may still be subject to Internet sales taxes if your company has even a marginal physical presence. The Wayfair decision essentially overruled the physical presence rule, and therefore you can fall under having to pay sales taxes if you establish an "economic nexus" under that state's laws. A "nexus" means that you are selling goods on the Internet or you have a physical presence in the state. So, at the very minimum, you owe taxes in your business's home state. And, you'll likely owe in states where you do significant business.
Here's where it can get even weirder if you are a consumer who purchases a tax-free item, and your state requires a sales tax. You are required to report that purchase to the respective tax agency and pay taxes on the purchase to them (for more information on "use taxes," click here). You can never escape, death or taxes, so you likely may have to pay taxes.
Here's some good news, though. Few states like Oregon do not have sales taxes, which is unusual, and only a few other states in the union have similar models, except you still cannot pump your gas in Oregon, which for motorheads like me, is upsetting. The Oregon Government website states, "The Wayfair decision does not affect Oregonians purchasing goods or services online because Oregon does not have a general sales tax." For more information, click here. So if you are a purely Oregon online business, you may be in the clear. But if you do business elsewhere extensively, you likely will have sales taxes to consider in those varying states.
Oh No Taxes, I Am Scared
You may need help if you have a larger small business, so that you may need a sales tax software. If you are looking into buying a sales tax software, this article, here, by The Balance Small Business will give you five tips that are enumerated below when looking around:
· Get A Checklist of What You Will Need
· Decide What Type of Sales Tax Software You Need
· Use Criteria when Evaluating a Sales Tax Software
· Consider Additional Options
· Consider Business Growth
It's going to be very important that you keep excellent records of sales transactions. This is because you are going to have to assess which states you have to pay Internet sales taxes for, and if you are audited, it'll be a big lifesaver to have those records on hand.
Now you may need professional help; this is where CPAs (Certified Public Accountants) and Tax Lawyers come in. They deal with tax-related issues all the time. If the IRS or a state or local tax agency comes after you, a tax attorney is going to be the first search. Also, if you are starting your business or need tax assistance, a tax attorney will help there as well. CPAs are also well-versed in the area of tax compliance and can help you with tax issues as well.
One beautiful thing is that many tax lawyers offer free first consultations on your tax problems. Another is that sites, such as TurboTax, will help get your feet in the water on the basics of Internet sales tax if you want to learn a little more about the topic. And, I do have a little good news, differing rates and exemptions do exist depending on the items being sold, but states are being a little more lenient because of COVID-19.
COVID-19, Extensions, and Relief
Some small businesses may be struggling to pay sales tax because of the COVID-19 global pandemic. That is totally understandable. And, many states are responding. Most states have offered time extensions and relief, depending on where you are. The California Tax and Fee Administration, for example, has extended quarterly returns for most businesses till July 31, 2020, for both the first and second quarters. Also, small business owners with less than 5 million in sales can take advantage of a 12-month interest-free payment plan for up to 50,000 sales and use tax liability. For more information, click here.
Exemptions? What Exemptions?
Glad you asked. There are tax exemptions even in the Internet tax world and exempt entities (one that comes to mind are religious institutions usually). Often, foodstuffs and clothing that cost below a particular mark will not be taxed. Nevertheless, this is a state by state decision, and it depends on your local laws, and where your buyers are located. Also, some states and the IRS will require you to apply for a tax-exempt status, so you'll have to do some groundwork to get exemptions usually.
Further, at least in California, if it is a purely electronic transmitted good, such as a digital download, then you may be exempted, which is excellent news if you are currently in the Ebook market. But, the glaring exemption is that if you send a physical storage medium such as a flash drive, or send a printed copy as well as a digital, then it is usually taxable. So, you are going to have to do your due diligence in seeing if you actually, safely, and securely fall into a certain tax exemption. And, just a friendly reminder, you’ll have to do it state by state.
Wait, This Is The Internet, How Is It Going To Be Enforced?
Also, a good question. The Internet is a hard area to regulate, but like any government entity, they want their tax money, and they're okay if it takes some time to find you if you aren't paying in. It is always better to be safe than sorry (in this case, sorry is being audited and owing a lot of money). You do not want to have to owe money to a lawyer in a time of need when you could've avoided the entire situation. Aim for compliance first.
Okay, All Of This is great, So Do I Just Send a Check To Them After I Calculate?
You wish it was simple like that, but no. The calculation is where it gets hard. Depending on the state, you have to register with their Tax Agency. For California, the California Department of Tax and Fees Administration (or also called the CDTFA) is the organization in which you will have to receive a certificate of registration. Well, you may think that if your headquarters isn't in a state, then it will not matter. That is not true because states usually require you to register if you are "engaged in business in the state," which means that if you exceed a specific monetary limit, or have a physical location or sales representative, that you will likely have to register with their tax agency.
Also, as I'm sure you know from filing your taxes or having someone else do it, the process is complicated and, for sure, can be difficult for businesses as well. You may need more help there, especially. If so, use significant organizations like TurboTax. Additionally, they help you with both federal and state additional ones. But, if it is tough to keep track of all of this, I recommend getting an accountant or CPA that can do your work. It turns out that about half of accountants in the US are also CPA's. If you need help finding a CPA, the American Institute of Certified Public Accountants has a list of accountants that are searchable by state and city; you can see that information here. As I always say, if you need help, seek help. Dealing with financial stuff can be a bit tough when you are on your own.
Internet sales tax, and knowing if you have to deduct, can be quite a pain. So, consulting tax lawyers and a CPA can help you a lot. Tax lawyers will offer you free consultations often to help you deal with tax issues. Also, many tax lawyers are often needed if you have to seek Tax relief due to the amount of debt you have accumulated. Ask around, and you'll find a good tax lawyer, as well as search on the web. An example of a large tax firm would be J. David Tax Law. Tax lawyers are also outstanding if you've been contacted by the IRS. Having professional help will make sure when sales taxes are involved, your business runs smoothly.
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