What Is the Tax Law for Online Shopping?
Like shopping in the offline world, online shopping typically includes taxes. Avoid legal repercussions; learn your state tax agency's rules about who to charge for online shopping and how much to charge them before taking your ecommerce site live.
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Obtain a Sales Tax License
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All states except for Delaware, New Hampshire, Montana, Oregon, Hawaii and Alaska charge sales tax, so unless you live in one of these states you need a sales tax license from your state's tax agency. A sales tax license allows you to charge sales tax to your customers; otherwise, you may face fines of as much as several hundred dollars for every day you operate without a license. Some states charge a fee for sales tax licensing while others provide the license free of charge. Ask your state tax agency whether you must charge sales tax when selling items on auction and classifieds websites and whether you need a license to do so.
Ask Where Your Customers Live
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Despite the Internet's global reach, the law only requires you to charge sales tax to customers within your state. So if, for example, your online store is based in Iowa and a New Mexico resident makes a purchase, don't charge him sales tax. If an Iowa resident buys from you, you must charge her. Set the sales tax options on your ecommerce software to charge sales tax to customers within your state. Each customer must indicate where he lives at some point during the transaction, and the software adds sales tax for you.
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Know What to Tax
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Not everything you sell online is taxable; for example, most states that charge sales tax exclude clothing and food items. Contact your state's tax agency to find out which products and services you must tax. When selling a product or service on your website to which sales tax doesn't apply, leave the "Add Tax" field unselected. (The text for this field varies depending on the ecommerce software you use.) The software applies taxes only to customers in your state and only to the items for which you select this field.
Consider Your Business Location
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Even if you operate your business exclusively online, the state in which you operate may regard your business as having a physical location. For example, if you're a sole business owner and manage your online store from your home, your state may or may not consider your home a business location. If you have a business partner who manages the store from a location in another state, the state in which he lives may or may not consider his home or office a business location for your store. Contact the tax agency in each state where you may have a business location to learn the tax laws for online shopping.
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