Owning an online business is a great way to bring in extra income while working as your own boss. Benefits such as making your own schedule and working from home are just some of the reasons people choose to own and operate a business online. There are still expenses to be paid and laws to be followed, however. One of the most important laws to know about is how to handle online sales tax. Though the rules can vary by state, they all follow the same basic structure, and it is important to understand what that structure is.
How Do I Know if I Need to Charge Taxes?
A general rule of thumb when deciding whether your online business needs to tax your customers is to follow the nexus rule. A nexus is the physical presence of a business in a state. This can include a store, an office or a warehouse. In some states, it is even considered a physical presence if you take frequent business trips to the state. Each state defines a nexus differently. If you are unsure if your business is considered to have a physical presence in a state, you should contact that state’s revenue agency. If your business is considered a nexus, you will need to charge sales tax to the people in that state. If you do not qualify as a nexus in a customer’s state, then they will not need to be charged sales tax.
How Was This Rule Decided?
The rule about mail-order business taxation laws is based on the Supreme Court’s ruling in Quill Corp v. North Dakota (1992). In the case, the Supreme Court Justices decided that all mail-order businesses would have to follow the nexus rule, and could not charge sales tax to a customer if the business was not located within their state. As the Internet became more popular and online shopping began to take the place of shopping in brick and mortar stores, many states adapted laws to include online shopping into its mail-order business taxation laws. However, no official ruling has ever been made about taxation for online shopping.
Are There Any Complications?
One downfall of the nexus ruling is that tax rates are actually determined by the states and can vary from state to state, and even from municipality to municipality. To make it even more complicated, some states do not charge any sales tax at all. Those states are Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. It is important to be on top of changing tax laws in each municipality and state that your business has a physical presence in. Try asking your current tax professional for tips about notification systems and other ways to keep up on the changing statutes.
Isn’t there an Easier Way?
One way that many owners of online businesses choose to handle the taxation is to implement online shopping cart software. Some of this software is very basic and offer no tax programming. In this case, the owner will want to hire a professional assistant that specializes in building and modifying shopping cart software to include tax information. Another option is to purchase one of several shopping cart software options that automatically includes programming to handle taxes, and automatically figures taxes on each order.