Even without the recent headlines regarding Amazon’s lawsuit against New York, eCommerce Sales Tax has become a pressing issue for companies that sell online. The guidelines differ from state to state, can be extremely complex, and can lead to significant problems for companies that are not up to speed. Rosanna DiFilippo answers some topline questions about the issue.

In addition, we invite you to listen in on an audio interview with Rosanna on MFA’s Thought Leadership page.

Q. Is sales tax for online transactions any different than for in-store purchases?

A. It is often not the type of purchase made but the location of the sale and delivery of items that make eCommerce sales tax complex. Taxation is generally dependant on whether the seller has “nexus” in a state - that is, whether its presence in a region means they are actively doing business there. The trouble is that the guidelines for nexus are not uniform; companies may be subject to sales tax in one state but free from taxation in another.

Q. What are the different guidelines?

A. Guidelines differ from state to state, but here are a few examples:

- In California, sales tax does not apply to the sale or lease of prewritten programs if the product is transferred for download by remote telecommunications from the seller’s place of business to the purchaser’s computer and the purchaser does not obtain tangible personal property (i.e., a CD on which the software program is written).

- In Connecticut, canned, or prewritten software is considered tangible personal property and its sale, leasing or licensing (including upgrades) is taxable at 6%. Here’s where it gets tricky, though: if software is downloaded but no tangible property is transferred, the charge assessed is for computer and data processing services. That means a Connecticut retailer of downloaded software is actually a retailer of computer and data processing services and must register, collect, and remit sales tax of 1%.

- In Massachusetts, whether delivered through tangible or electronic means, a sale of prewritten (canned) software is a taxable sale and is subject to sales tax.

There are more variations across the country. Be sure to identify the states in which you or your portfolios companies transact business and ask your CPA about the definition of nexus and how taxes are applied to online sales.

Q. If sales tax does not come into play, is there another tax that must be complied with?

A. The short answer is generally “yes;” when sales tax does not apply, often “use” tax comes into play. Let’s take, for example, a software package that is sold by a vendor in Oregon and shipped to a buyer in Massachusetts. The buyer may be charged tax if the vendor has nexus in Massachusetts, however if the vendor does not have nexus in Massachusetts and is not required to collect sales tax, then the burden of paying use tax lies on the Massachusetts purchaser.

Collecting use tax, however, can be difficult for states to track. That makes it easy for it to fall through the cracks and go unpaid today, but as states come together in a unified taxation system there could be a backlash and penalties for noncompliant purchasers.

Q. What will a change in e-commerce sales tax mean for online sellers?

A. Only time will tell for certain, but creating consistency across all states will have an impact on online purchasing, especially in states which currently have a complex sales tax system. In the late 1990s, when e-commerce was at its peak and Internet “pure play” retailers were enjoying heightened success, studies showed that more aggressive online sales tax would inspire marginal shoppers to abandon online purchasing and head back to their local brick-and-mortar stores.

However, a recent study found that the market’s adjustment to “click and mortar” has lowered sensitivity to tax rates. Businesses with an online transaction element and a physical store are in the safest position.

Q. Why are we hearing more about this now?

A. With the soft economy, states are being more aggressive in collecting sales tax. It is no wonder, as the states are hurt the most by the complex system: retail e-commerce sales in Q407 alone totaled $36.2 billion, a drastic leap since Q402, when the same sales were at $14.3 billion. States have the most to gain by collecting taxes in such a powerful marketplace, and they are motivated to get a more enforceable system in place.

Q. How will I know what changes are coming?

A. The easiest way is to keep in touch with your CPA. But there are also organizations that are proactively pursuing uniformity:

- Streamlined Sales Tax Project (SSTP), which follows a mission of radically simplifying sales and use taxes. SSTP has 17 full member states, and nearly all 50 states are involved on some level. In addition to the uniform definitions for taxable goods and services, simplification of tax rates and reducing the compliance burdens for businesses, the SSTP promotes an Amnesty program for unpaid sales and use tax, which can be applied to sellers in states that agree to conform to uniform standards going forward.

- The Multistate Tax Commission (MTC) is an intergovernmental state tax agency which works on behalf of states and taxpayers to administer tax laws that apply to multistate and multinational enterprises. Nearly all states support the MTC on some level, and the website provides ongoing updates on activities around nexus uniformity, court cases, and legislation.

This entry was posted on Monday, June 23rd, 2008 at 8:00 am and is filed under Q&A, Sales tax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.