E-Commerce and internet sales taxation is one of the most contentious areas in sales tax today. There have been many arguments for and against the taxation of internet sales. Some states contend they’re losing billions in sales tax revenues as a result of uncollected sales tax on internet sales, while many on-line retailers maintain that a 1992 Supreme Court decision prohibits states from imposing a sales tax collection requirement.
Who must collect sales taxes?
According to the Small Business Administration:
- 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.
- If you do not have a presence in a particular state, you are not required to collect sales taxes.
In legal terms, this physical presence is known as a "nexus." Each state defines nexus differently, but most 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 your state's revenue agency. If you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state. This rule is based on the 1992 Supreme Court ruling, also known as the Quill case, 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.
Are there any differences in Colorado?
Effective March 1, 2010 through June 30, 2012, standardized software was subject to sales and use tax in Colorado, regardless of how the software was acquired by the purchaser or downloaded to the purchaser’s computer. Effective July 1, 2012, the tangible personal property definition excludes standardized software that is not delivered via a tangible medium. Software provided through an application service provider, delivered by electronic software delivery, or transferred by a load-and-leave software delivery is not considered delivered to the customer in a tangible medium. The legislation effectively reinstates an exemption for electronically delivered software that was in effect prior to March 1, 2010.
Additionally, there has been some uncertainty about how Colorado taxed SaaS during the brief period that electronically delivered software was subject to tax. This is a perfect illustration of how difficult it is for taxpayers to track the numerous changes in the sales tax treatment of these items, even changes that happen in a single state. It should be noted that, although Colorado does not tax SaaS at the state level, this may not be true locally.
Determining which sales tax to charge can be a challenge. Many online retailers use online shopping-cart software services to handle their sales transactions. Several of these services are programmed to calculate sales tax rates for you.
Keep in mind that not every state and locality has a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. In addition, most states have tax exemptions on certain items, such as food or clothing. If you are charging sales tax, you need be familiar with applicable rates.
If you have any questions on sales taxes, don’t hesitate to reach out to us. While we work more in the realm of income taxes we have the research tools and competency to assist with any sales tax issue that may come up in your business.