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The Need to Know about Online Sales Taxes


Update: Learn more about the U.S. Supreme Court's June 21, 2018 ruling on online sales tax. 

Online sales taxes play an interesting and complex role in the tax world. To determine which sales are taxable to your customer and collectible by your business, you must understand what the point of origin is. Think of sales taxes as being a reasonable charge for reimbursing the government for a variety of costs it incurs during the sales process. Costs include contracts, sales tax law enforcement, and certain public goods.

Defining point of origin

In non-technical terms, point of origin means you are responsible for collecting and submitting sales taxes in the state where you physically operate your business. The current tax structure is origin-based. For instance, if you make a sale in Illinois, you need to collect and remit sales taxes on items sold in Illinois.

Destination-based tax laws

Some states, such as Washington, choose to use a destination-based sales tax structure. This requires businesses to collect sales taxes based on the delivery location of their customer, or the destination of the product. Certain wholesale sales are not affected, however. These include vehicle sales, aircraft, boats, mobile homes, services, florists, and towing companies.

Businesses without a physical presence

Currently, you are not responsible for collecting sales taxes on goods sold in remote locations where you do not have a physical presence. In other words, if you sell online goods to a customer in Ohio, but do not have a shop there, you do not need to collect and submit sales tax on the goods.

Businesses with a physical presence

If you sell online goods in a state where you do have a physical plant or presence, you are responsible for charging your customer sales tax. Since you receive sales tax, you are also responsible for the proper recording and submission procedures.

Minimizing the burden

As of 2012, only six states are collecting online sales taxes. Many consumers enter brick-and-mortar stores to physically research products. Then, they use their mobile devices to purchase the item online. Usually, companies offer online specials as a sales tool. A bill titled Marketplace Equity Act of 2011 attempts to level the playing field between traditional retail stores and online merchants. The bill is an attempt to minimize the burden of collecting and remitting taxes to over 9,000 localities – including local, county, and state taxing authorities. Instead of considering all these localities, the bill imposes taxes only at the merchant-based point of origin. A key argument against the bill is the fact it lacks complete guidance on collecting and submitting appropriate taxes.

Online sales taxes are a complex issue that all business must understand. Laws must equally satisfy tax policy principles, fairness, and simplification. It is a volatile topic that is sure to include many changes.

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.