Understanding internet sales tax can be confusing, or even downright tricky. So what can you do to keep up?
When running a brick-and-mortar store, collecting and understanding sales tax are pretty straightforward. As customers buy from your store, you charge them the sales tax that is required by the jurisdiction where your business is located. For instance, say you own a store in Birmingham, Alabama… then you should be collecting both state and local sales taxes from shoppers. If you’re in Alaska, Delaware, Montana, New Hampshire or Oregon, however, you should remember that these states do not levy a sales tax.
But what if you own an online store? Do the same rules apply?
Here are a few tips on understanding internet sales tax when you’re an eMerchant:
Does Your Store Have a Physical Presence?
The first thing you need to do is to determine if your business has a significant presence in a particular state. In legal terms, a physical business presence is called a “nexus.” It is easy to determine if you have a nexus in a particular state: do you have a corresponding physical store, office, or warehouse? Any of these constitutes a nexus, so you will need to collect applicable state and local sales tax from your customers.
If you are sure that you do have a physical presence, you will need to…
Register for a Sales Tax Permit
The next logical step is to secure a sales tax permit (if the state where your physical presence is located requires it). This must be done before you can begin collecting sales tax. To register for a sales tax permit, it’s a good idea to check out your state’s Department of Revenue website first, or better yet, give them a call.
After you have registered, you can then determine when and how often you will need to pay— this is often at the discretion of the state where your nexus is. Depending on your state’s tax laws, you can either remit your sales tax monthly, quarterly, or annually. Take note, though, that most yearly due dates fall at the start of the year—January—so most probably almost every online store owner will be scrambling to file and remit their sales taxes at this time. Be ready.
But There Are State Exemptions
It’s important to note, however, that even if your online store has a corresponding physical presence, if you are in a state or locality that doesn’t have a sales tax then you’re in luck! States that don’t have a sales tax include Alaska, Delaware, Montana, New Hampshire, and Oregon (and Hawaii only charges a GET). Some states have tax exemptions on certain goods such as foodstuffs and clothing, so if you are charging sales tax on customers for your online store, it’s a good idea to be familiar beforehand on the applicable rates… and keep up on changes, as they frequently occur.
What You Need to Know About European Value-Added Tax
We’ve only covered sales tax in the United States thus far. Here is an important thing to consider if you are planning to sell globally, or at least sell online to customers in Europe:
The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
In layman’s terms, VAT is due on all sales of digital goods and services to retail customers in Europe. In fact, a VAT law in place since 2003 requires online store owners that are nonresident sellers in the European Union (that includes, in other words, eCommerce owners from the United States) to collect and pay VAT on all products bought online or digital services paid for. That means before any business can take place online between the seller based in the US (you) and the customer living in Europe, the business owner is required to be properly registered for VAT. And that means you need to register for VAT in a European country where you expect to have customers. Since January 1, 2015, online sellers who expect to have customers in each of the twenty-eight EU countries will need to register for VAT in each of the twenty-eight EU countries, file VAT returns in each of these countries, and collect local VAT from your customers with different rates.
Almost all goods and services that can be bought and downloaded on the Internet by online shoppers are within the scope of European VAT rules. Remember also that VAT rates differ between countries in the EU. And because the amount of VAT due on the sale is included in the retail cost offered by the digital supplier, it is imperative that you factor in the varying VAT rates across the European market when you price your products or services.
To avoid any problems that might crop up and to ensure smooth business transactions, it is a good idea to contact a local tax representative of the EU country you wish to sell to or to consult a tax attorney who is an expert on tax laws in the European Union.
The bottom line is, determining which sales tax to charge can be challenging. While these tips are certainly useful when in doubt, it’s always a good idea to check your state’s taxing authority. Or better yet, you can choose an online shopping cart software service that can handle your sales transactions. Many of these services are already programmed to calculate your sales tax rates for you.
What tricks do you use to keep up with internet sales tax? We’d love to hear your tips in the comments below!
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