Online Collection of Sales Tax

A normal business which is located in a physical store has to collect sales tax as a usual practice. This tax is collected from the customers according to the rates specified by the local city, state, or at federal level. There are certain jurisdictions where both local as well as state sales tax are charged from the customers purchasing the products.

If you are running the business online then what will be the rate of sales tax; does it differ from that charged on customers buying from a physical store; and do both local and state sales taxes are applicable. The answers to all these questions will be described in the following paragraphs.

Online sales tax collection

It has been mentioned earlier that when you run a business from a physical store, warehouse, or an office, you have to charge your customers for all the local and state sales taxes specified in that particular jurisdiction. But in case you do not have a physical store or office, no sales tax is applicable.

 This physical presence in a certain area is known as a “nexus” in legal terminology. The definition of a nexus varies in different states but every state considers the existence of a nexus when the business is selling its products from a physical premises. If you are not clear whether your business is a physical presence or not, the revenue agency of the particular state can provide help in this regard.

When you do not have a physical presence in the state, you are not supposed to collect any sales tax from your customers. According to a 1992 ruling of the Supreme Court, if mail-order businesses or online business owners do not have a physical presence in the state, they do not have to charge their customers for sales tax.

For online businesses various online shopping-cart services are available for making sales transactions which include sales tax.

Sales Tax Exemptions

As an online business owner you should know that there are some states where no sales tax is applicable. They are Alaska, Hawaii, Oregon, New Hampshire, Delaware, and Montana. Similarly some states have tax exemptions on food, clothing, or other items.