Online Sales Tax for Ecommerce

08 October 2010

I can write about death or taxes. I'll pick the one that worries people a lot more - taxes, specifically sales taxes online and how they effect ecommerce.

In a perfect ecommerce universe, you would charge sales tax to everyone and pay it to the resident state in which your business was located. Which is how it should work. Right now what is heading to the online world is you having to pay sales tax in whatever state the buyer was in. Or is that where the buyer shipped the order to? Do they even know yet? What about military AFO orders?


I guess I need to make a short update after seeing what people are putting into a search engine to find this page.

Q: Do I have to pay sales taxes to all 50 states or states other than where my business is located?
A: Not at this time. While there are states that are trying to force this to happen, the issue will spend years in court before a decision is made.
As a business you have no government representation in states other than your own. There are laws in states like Kansas, which require citizens to report purchases made outside of the state and to pay taxes on those items. However that is a different issue.

Contact your local government about what your requirements will be in regards to sales taxes in your area. They will have resources for you to help you get started. Just ask for someone that will have answers for new business owners. My information should be considered just information, sure it's from someone doing this since 1994, but just information none the less. You pay your online sales taxes the exact same way you would for a physical store. There should be almost no difference in how you collect and file. If you are in one state and your customer is in another, they do not pay sales taxes on that purchase at this time. If you have stores in different states, you will need to collect sales tax on people in the same state you have stores in. Even though I rant a bit, don't let it discourage you. The worst mistake I see businesses do over and over is not pay the taxes owed. This article covers more the part of you collecting the taxes. (I made another to cover paying ecommerce sales taxes)


The issue is idiotically complex due to how sales taxes work. Government is coming to save the day... I was almost able to write that without a smirk. Of course the option the government is choosing is complex and shows a lack of understanding for small ecommerce companies. Instead of paying taxes where your business exists and having a simple system that would encourage incentives for companies to locate ecommerce businesses in their state, they are doing something that is a little more punishing.

So you get to pay sales tax in every state that had someone do business with you. Joy.

I wish it stopped there. In the future there are real issues on the way that could cause massive problems in just figuring out whom to write the check to.

For instance you're an ecommerce business is in Kansas, your buyer is in Oregon and wants you to ship their order to Florida. Who gets the sales tax? Maybe all of them. I've heard lawmakers talk about doing just that and pretending it wouldn't cause people to stop doing business or at least stop doing business in whatever state is too greedy. Here is their logic behind tax overpayment: The location of the business pays because their state consider that a sale in their state. The buyers home state wants their cut because they consider that a sale in their state. The ship-to state considers this a sale there because that is where the product ended up. Hopefully someone doesn't have the bright idea of adding in the location of the web server.

If you want an example of what ecommerce companies would do, hit a wine ecommerce site and try to order a bottle of vino to be shipped to Alabama. You will be told that there is no way you can place the order. Or at least you should, since Alabama would consider you a felon if you were to do that. That's to protect teens from drinking. Since everyone knows that teens get their groove on with $300 bottles of wine.

Your head hurt yet?

Right now, the basic rule of thumb for ecommerce is if the buyer is in a state where you have a physical presence, you pay the sales taxes there. I can tell you, that is still a problem trying to figure it out. Do you charge the tax of where your location is or where the buyer is? Normally you do your location, but you can see where there could be more confusion due to local sales tax.

There are many solutions for calculating taxes in real time. If you do all your payment settling and tax calculation online, then you need to pay the price and get a system in place. Some businesses have tax systems in place on a back end system or main-frame. The web site calculates the order, preauthorizes the credit card and then the back end system takes over the order for final calculation and settling of the credit card charge. However that back end system may already have tax calculation software built in, so why pay for the service twice? "Don't", would be my advice. I guarantee sooner or later you will be burned by having two tax systems calculating.

Allow me to illustrate how the burn will occur. The customer comes to the ecommerce site and places an order and is told their order is $169.76. Your main-frame picks up that order and processes it but with the charge of $170.85. This will happen. We have seen it time and again. It is not uncommon for website tax programs to update their software daily and update the main frame monthly. That customer will indeed call in about that difference. CSR's always wonder why the customer is so upset over such a minor amount, but are happy to make the adjustment. The reason the customers are upset is simple, they trusted you and it looks like you couldn't be trusted. There is a slight feeling of betrayal. I wish I could tell you it is a rare occurrence, but it isn't. In the customers defense, each and every one of them that I have explained this too has understood the problem. Also, trying to get the amount in the order to equal what you originally told the customer is always fun, again "don't" would be my advice. Give the customer $5 off which will make the customer happy and you won't have a CSR spend $20 in time trying to get the order just right.

What is the solution with two tax calculations? Simply find the worst case tax scenario for each state you have to pay taxes to and then charge that rate to everyone in that state. Then when your back end settles, it adjusts the customers total to a lower value if needed. Anyone that has placed an online order has likely seen this exact situation. Their total is a few cents lower than they were told. It results in a lot less headache for everyone. Just make sure you adjust to what it should be in case you get questioned. States have very little sense of humor when it comes to overcharging taxes. The above isn't overcharging, it's over-estimating. The settlement will charge the correct amount.

That is just the problems on collecting the taxes. How about what to charge them on? Florida can have tax-free periods for hurricane supplies, which if you sell camping gear will effect you. Sell food? Some states don't charge sales taxes on food items, others won't charge sales tax on food or clothing. Some states consider wine a food, others don't.

How about now? Your head hurt yet?

I nearly died a few months ago. It was a close call. I was talking with a potential client about their potential ecommerce site and I brought up sales tax. Their response, "My web designer said I don't have to charge any sales taxes for ecommerce." You would think I had a major coronary on the spot. That is some dangerous water to tread. At the very least charge the people in your own state. I can get you the names of some business owners that played around with their sales taxes. If you'd like to talk with them about the experience we can see if arrangements can be made for next visiting day. Play it safe, states are a lot more understanding of businesses that make a fair and reasonable attempt than those that just hope to skirt under the radar. Consult with a tax professional, and one that has some experience in sales taxes at least. If you know of someone that has online sales tax experience, have them contact us. We are always being asked for references.

After all this you might think I am anti-tax. Well a little, of course who isn't. I've always said the day would come and ecommerce would have to charge sales tax on all online sales. I wish the big players would have been more active in Washington to make this a more logical process. As it is, we will face 50 sales tax returns eventually. If the states are smart they will make the process as painless as possible so that they can collect as easily as possible. There's that smirk again. I can hope that the states will have a web page that contains a single sales tax rate for the entire state, what product types to charge taxes on in a clear, concise manner and the form to fill out to send in with the collected taxes. Hey, I can dream can't I?

I'd much rather have a single rate that only applies to the home state of the ecommerce business. There is an inherent problem that I think most politicians are glossing over when it comes to making out-of-state businesses pay their sales tax. If I'm an out of state business, I have absolutely no representation in any state outside of my own. I can't call my local representative and complain about the tax code in Alaska, and in Alaska they would care less what I think. It's not like I voted for them. That whole "taxation without representation" thing actually applies this time. Again, making an ecommerce business charge their states sales tax to everyone that shops with them and then pay it to the businesses state really works the best.

I like using real world analogies when I explain things in ecommerce. Cart abandonment for instance isn't like someone walking out of your store after filling their cart. It is more like someone reading your Sunday newspaper flyer and then not coming in. In this case, imagine a gas station. Now think about how every car with out-of-state tags would pay a different rate and that required the station to make a tax payment to that car's home state. You pull up to a pump and the first thing that happens is you have to punch your zip code into the pump and watch the price of gas go up or down. It sounds silly when you look at it logically. Add to that, the state now has to enforce this. Anyone really think states will bring in more money this way? States will spend thousands of dollars trying to get a couple hundred dollars from a business two time zones away. They already have enough trouble trying to get out of state people to pay a speeding ticket. Or, they could just worry about the businesses they are already communicating with and enforcing their tax codes upon. Like they do with ever other business in their state.

The problem I think is all the media that surrounds companies like Amazon and Land's End or any other major ecommerce retailer. People hear those stories and forget that there are a lot of little guys that have to do business in the same space. So when a law is passed that would make everyone with an ecommerce site hire 10 accountants to keep it the books straight, they forget that the guy with five employees still has to be able to do his own books.