Does your Maine-based small business sell products or services over the Internet? It is extremely important to understand the laws pertaining to the collection of sales taxes.
Collecting sales tax is relatively straight forward if your business has a physical store. You charge your customers the sales tax required by the jurisdiction where your business is located. For example, if you operate a retail store in Portland, you would collect both state and local sales taxes from customers buying merchandise at your store.
But suppose you start selling your products online. Does that mean your customers should be charged the same sales taxes as those who are coming into your store? It depends. If your business has a physical presence in a state, such as a store, office or warehouse, you must collect applicable state and local sales tax from your customers. But you are not required to collect sales taxes if you don’t have a presence in that state. Keep in mind that there are some states that define physical presence to include affiliated entities.
In legal terms, this physical presence is known as a “nexus.” Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain whether or not your business qualifies as a physical presence, contact Filler & Associates and your attorney, or state’s revenue agency.
The sales tax rule is based on a 1992 Supreme Court decision (Quill v. North Dakota, 504 U.S. 298) in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. The Court reasoned that forcing sellers to comply with more than 7,500 tax jurisdictions was too complex for sellers to manage, and would put a strain on interstate commerce.
Remember that not every state and locality has a sales tax and laws of each state are still evolving. In addition, most states have tax exemptions on certain items, such as food or clothing, and many have sales tax holidays for a few days a year on items like clothing, school supplies and energy star products.
If you are charging sales tax, you need be familiar with applicable rates. You may also have use tax requirements. If you have purchased items for use in one state from retailers that do not collect sales tax for that state, you generally owe “use tax” on those items. Residents in certain states are responsible for paying use tax on their out-of-state purchases.
Determining which sales taxes to charge can be a challenge. Many online retailers use online shopping cart software services to handle sales transactions. These services are programmed to calculate sales tax rates for retailers. It’s important to understand the complex calculations involved so that your Maine-based business is in compliance with sales tax reporting and payments. Consult with Filler & Associates about your responsibilities to collect sales and use taxes as an Internet-based company.