by Bonnie Lee
Comprehending sales tax law is a lot like trying to understand the dinner table conversation at the mad hatter’s tea party. Sales tax law varies from state to state, and each industry has a special set of tax rules it needs to follow.
At least with the IRS you can pretty much go by the sweeping statement regarding business deductions that says, “You may deduct all ordinary and necessary business expenses.” Subjective, yes, but the maxim works.
But when it comes to sales tax, the rules are different. For example, I took a pair of shoes in to the shoe repair guy in town for what I thought was a labor intensive project only. In California, labor is not subject to sales tax. However, he charged me a small amount of sales tax, lower than the going rate. When I questioned him about it, he responded that he uses a spray material in the process and is required to charge a 2% rate against the total sale to reflect the material that was used.
And in the upholstery industry, another labor intensive service, the business owner is required to charge sales tax on nominal materials such as tacks and staples.
The list goes on.
In fact, the California State Board of Equalization publishes brochures for various industries listing out the specifics of the requirements in an attempt to simplify the process.
Now we have new sales taxes to contend with: internet sales tax and digital download sales taxes.
According to Jonathan Barsade, CEO of Exactor and former tax attorney at Akin Gump, says Amazon’s growing popularity was a main trigger to the implementation of the internet sales tax.
“When Amazon expanded to other states, sales went down by an average of 10% compared to states where sales tax wasn’t an added factor. Consumers also decreased their Amazon spending by nearly 24% on larger purchases of $300 or more.”
It’s nice to see a leveling of the playing field. After all, if brick and mortar stores are required to collect and pay sales tax on retail transactions, then internet stores should be under the same obligation. Otherwise, what you have is a general populace responsible for tracking and paying a use tax for their internet purchases. It’s much more difficult and expensive to audit and control taxable internet transactions if the taxing agency has to track through individual consumers rather than at the source.
If your business sells products on the internet, it is your responsibility to check with your state taxing agency about reporting requirements.
According to Nolo Law for All, “The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a ‘physical presence.’ The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.”