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Internet Sales Tax

As you’re probably aware, states can only (currently) require sellers to collect sales tax from online sales when the seller is physically located in the state.  If the seller is not located in the state, the buyer is obligated to pay the sales tax to the state, but in practice this is rare and the tax goes unpaid.

States are eager to collect this sales tax, and have been pushing for new Federal law that would allow them to force out of state online sellers to collect and remit sales tax to them.  There are currently two bills in Congress that would do this, and they have some bipartisan support, so it’s likely states will get their way in the not too distant future.

Each of the bills in Congress has a sales threshold below which online sellers don’t have to collect and remit sales tax.  One of the bills proposes $500K per year in sales, the other $1M per year in sales.  These are fairly low limits, so most people who are serious about selling online will need to comply.

While the most obvious effect of this on online sellers is the sales tax they’ll have to collect and pay, the bigger problem is actually the cost of complying with sales tax collection in thousands of tax districts.  Sales taxes are not flat within a state, as each state and local government jurisdiction can add its own tax to the sales tax.

It’s possible the law passed by Congress will require a simplified sales tax structure for out of state online sellers to make the cost of compliance reasonable, but it’s also possible it won’t.  The easiest thing to do would be to have a flat sales tax for all online sales, which sellers would send to the Federal government, and the Federal government would then distribute to states in proportion to their population.  Of course, since this would be the simplest thing to do it won’t be done that way.

I’m sure we’ll hear more about this in the coming months.  Please contact your Congressman asking for a simplified sales tax collection requirement in any online sales tax bill to make compliance reasonable for small businesses.  State governments would probably not object too much, as they would get most of the benefit of full sales tax payments with a minimum of effort for themselves.

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