Sales Tax and the Internet

This morning I sat in on a webinar hosted by a company that provides sales tax services to businesses. Of course, it was essentially a sales pitch, but there was a lot of good information presented--enough to make me consider never selling anything again! While that's not going to happen, it was an eye-opener for me, and I thought I was reasonably familiar with sales tax rules. 

At least I feel reasonably comfortable with the California sales tax regulations as they apply to my clients' businesses. I didn't think I needed to worry too much about sales tax in other states for any of my clients because none of them have a "physical presence" in any other states. The "physical presence" provision, in case you are interested, came about in 1992 as a result of a petition by a mail-order retailer named Quill. But in the 20 years since this ruling, interstate sales have exploded, thanks to the Internet, and revenue-starved states are turning a hungry eye toward those interstate sales.

Some creative states have developed some, um, interesting definitions of "physical presence". For example, if you advertise on cable television in Alabama, whether or not you are actually in Alabama, you are considered to have a physical presence and must collect Alabama sales tax.

If you live in California (and probably elsewhere--it's hard enough to keep up with California laws), and you buy something from an out-of-state vendor who does not need to collect sales tax, you still owe the California Board of Equalization sales tax on the purchase. As a convenience, you can report and pay it when you file your California income tax return. How many people actually do this? I don't have any statistics but I bet it's not as many people as actually made those purchases.

Non-compliance, whether intentional or not, costs the states a staggering amount of revenue each year. So they aren't very forgiving about non-compliance, and plenty of people have been put out of business by demands for uncollected sales taxes, plus the penalties and interest. Any developments on the sales tax front deserve the business owner's attention. And internet sales are in the crosshairs, as the tax that is currently not being collected on internet sales is estimated to run in the billions.

In 2000, the Streamlined Sales and Use Tax Agreement (SSUTA) was crafted by the Streamlined Sales Tax Governing Board "to simplify and modernize sales and use tax administration...in order to substantially reduct the burden of tax compliance." The goal was to find solutions to the complexity in state sales tax systems resulting from current laws governing online sales tax and remote sellers (SSUTA Website).

There are currently three online sales tax bills that Congress is considering, two of which rely on the SSUTA to help establish online sales tax regulations. The bills are the Main Street Fairness Act, the Marketplace Fairness Act and the Marketplace Equity Act (the first two rely on the SSUTA). I'm not going to go into the details here (I got my information here) but heads up that if you sell to buyers in other states, you will probably be entering a whole new world of sales tax collecting and reporting. As for me, I'm going to check out the services provided by the company that hosted the webinar (it was Avalara) to ensure compliance for me and my clients.