One of the more commonly recurring incorrect perceptions in running online related businesses is the notion that sales taxes are not due on Internet transactions. It should be clear from the outset that Yes, retailers are responsible for sales taxes on Internet based transactions; Yes, retailers must provide clear auditable tracking methods of their transactions, through the entire life cycle of the transaction; and No – these requirements are not relevant to large businesses only, they pertain to retailers of all categories and of all sizes.
The original misperception originates back from a 1992 Supreme Court ruling, known as the Quill case. The Quill case was determined in the pre-Internet arena, but was subsequently applied to online transactions because of the similarity in circumstances. In Quill, the Supreme Court stated that it will not enforce sales tax rules. One rationale for the ruling was that of the undue burden. In other words, because of the inherent borderless nature of Internet transactions – each transaction has the potential of being subject to any-one of the over 7,400 taxing jurisdictions in the U.S. alone. The Supreme Court stated that tax systems are so complex, and there are so many jurisdictions, that it would be an undue burden to require retailers to be familiar with each and every jurisdiction, and comply with all of the different rules and jurisdictions. The Court was very explicit though to say that sales taxes do apply to these transactions, the court merely refused to enforce the rules.
Obviously, lack of compliance is quick to follow failure of enforc ement. As a result – retailers have traditionally failed to calculate, collect and pay sales taxes owing on Internet transactions. Many confused this lack of collection with the Tax Moratorium Act that was enacted in 1998. The Moratorium Act has nothing to do with Sales taxes. The Moratorium Act merely stated that no new taxes could be created on Internet transactions. This Moratorium Act was enacted in response to ideas that politicians started floating for creating new types of taxes especially for the Internet, such as ‘Internet Access tax” or “bit rate taxes.” But the Tax Moratorium Act was very explicit to have no effect upon existing taxes, such as Sales taxes. States did not enforce Sales taxes for much more practical reasons: there just was not enough activity taking place on the Internet – the dollars were simply not there.
Retailers have traditionally failed to calculate, collect and pay sales tax.
In the last two years both these variables have completely changed. There is much activity taking place. In fact, studies are showing that nearly $20B will be left on the table in 2005 as a result of uncollected taxes on Internet transaction.
State governments have also been operating in the red, and have empowered their agencies to seek new sources of revenue. They need to act, and act fast.
To address these circumstances and respond to the Quill ruling, state taxing agencies banded together to draft and sign the Streamlined Sales Tax Agreement, where emphasis is placed upon rule uniformity and simplification of compliance. The states hope that with this process in place, Congress will pass legislation which will expand the long arm capabilities of the court system, to reach out to out-of state retailers. The SSTP came into effect on October 1st, when a dozen states formally ratified rules reflecting those rules required under the SSTP, with another six states being in partial compliance – associate members. Nearly all other states have signed the SSTP contract, but it will take them some time until they fully implement the rules.
Sales tax compliance does not begin and end with the SSTP however. Current
Sales tax rules also apply to online transactions. State taxing authorities
are aggressive in enforcing existing rules, and not waiting for SSTP to come into effect. Barnes-&-Nobles, Borders.com and OfficeDepot found this out the hard way via back-taxes, interest and fines imposed upon them. Thousands of consumers nationwide were recently invoiced for taxes they did not pay when purchasing cigarettes through the Internet. Under Internet Sales Tax Fairness rules, companies are finding that they need to register and pay sales taxes if they want to sell to state governments.
Small companies, with revenue in the low millions, are being hit with audits and penalties of tens of thousands of dollars for failure to collect taxes. Then there is the offer that cannot be refused – start collecting now, and receive an amnesty for failure to collect in the past.
The bottom line is that sales tax compliance is a real issue, independent of the SSTP. Retailers need to be aware of this issue, and address it heads on. It is not one of those situations that you can beg forgiveness after the effect – you will owe penalties and fines for failure to comply on a timely basis. Fortunately, there are solutions that can help you address this issue. In fact, Next Generation Solutions that are being introduced into the market
promise to make this a painless process, providing a simple, cheap, reliable, accurate and effective solution that operates in a completely automated manner, so that business owners can focus upon generating business, rather than on whether or not they owe taxes, how much, when and to whom.
The perfect Next Generation Solution would be (i) hooked straight into your transaction engine; (ii) provide the information necessary to assure that the correct tax is being calculated; (iii) save the transaction and tax data for further reference; (iv) be hooked into systems that will allow it to track the transaction through its life cycle; so that (v) any changes made to the transaction are reflected in the system; (vi) on a periodic basis as may be determined by statutes and regulations – compile the data necessary for filing; (vii) generate a return and report necessary for complying with statutory filing requirements; (viii) make the return available for review and approval by the retailer; (viii) file the return automatically and electronically straight into the systems of the state taxing agencies on the required date, helping the retailer avoid fines, penalties and interest associated with late filing; (ix) obtain from the retailer funds necessary for payment of tax proceeds; and (x) pay the taxes owing on a timely basis, applying electronic funds transfer methods to assure timely payment at the last possible moment without incurring penalties for late payment.