Taxes Made Simple

“Interstate” transactions have historically been free from sales tax. In other words, if a catalogue company based in Illinois sells and ships a product to a customer in Missouri, the business was not responsible for collecting sales tax on the transaction.

The distinction between intrastate commerce and interstate commerce was always pretty clear until online businesses showed up on the scene. Suddenly several new questions arose:

• What if a company is based in California, but it uses a web hosting company based in Nevada? Does the company now have a physical presence in Nevada, thus requiring it to collect sales tax for sales made to Nevada residents?
• If a business’s entire interaction with the public is through its website (which is obviously equally accessible in all states), is it really accurate to say that the company only has a physical presence in the place where the business owner’s computer sits? And what if the business in question is a blog, run by an individual who does all of his site updates from his laptop, and he regularly travels between several different states?
• And finally, and perhaps most importantly: Are the state governments really going to sit back and let this ever-growing segment of the economy go largely untaxed?

For the moment, the answers to the above questions are about as simple as you could hope they’d be:

• A business only counts as having a physical presence in a state in which it has an office, retail location, warehouse, or other similar, fairly permanent physical location. In other words, just because a company uses a web hosting service located in a given state does not mean that the company now has a physical presence in that state. So for the California-based company above that uses a Nevada web hosting service, sales tax collection is only required for sales made to California residents (unless the business also has a warehouse or other similar presence in another state).

• Just because a company interacts with customers exclusively through its website does not mean that the rules are any different than before. A company does not have a physical presence in a state just because its website is accessible there.

• Even if a company is run entirely on a person’s laptop, and that laptop travels around a great deal, the business still needs a real physical location in order to count as having a physical presence in a state. As such, for the Missouri resident who makes a living with a blog about taking road trips, his company only has a physical presence in Missouri, and he’ll only have to collect sales tax on sales made to other Missouri residents.

The answer to the final question is a bit less certain. For now at least, the rules still work as they always have. As such, states are missing out on a tremendous amount of potential revenue, and many states are making big efforts to get the laws changed in some way that will allow for sales tax collection on every sale made online. So, while the current situation is about the best you could hope for as a business owner, you’ll certainly want to stay alert for potential changes. 

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