There are a few good things that come from doing business online: amongst other things you get access to over 2 billion internet users spread around the globe, you make huge savings by avoiding high rent street premises and you reduce your order processing costs. Unfortunately a certain level of complexity still remains, namely in the tax department.
In a brick & mortar store, this operation remains relatively simple. You collect sale taxes according to a number of factors such as where the transaction is taking place and the nature of the product or service being bought. In almost every case these parameters never really change. Online stores operates in a similar way but with one major difference; parties involved (buyer and seller) are often in different cities, states or countries which makes a challenge out of collecting the right sale taxes.
Online sale taxes in the U.S. and Canada
Canada has a rather simple tax policy. One federal sales tax is applied to almost every purchase and a provincial sales tax, unique to every province, is then added. In some provinces the two taxes are harmonized into a single rate, in others, they’re distinct. The rule here is that you charge the rate based on where the goods are being shipped to, it’s that simple.
In the U.S. things become more complex. Unlike Canada, sale taxes can be commissioned on federal, state, municipal, township, district and county levels. Meaning each of the 52 states can operate multiple sales tax policies within their borders bringing the number of different sales taxes for the united-states alone at around 14 000.
Ex: Arkansas has a state sales tax of 6.00%, plus any additional local taxes like Little Rock’s 0.5% city sales tax.
Adding to the complexity is the concept that online retailers need only to collect sale taxes in states where they have physical presence, also called NEXUS. So if someone from state A wishes to buy an item from an online company operating exclusively from state B, no taxes need to be applied. If the company has a physical presence in state A, then sale taxes for that particular state and additional local taxes need to be applied to the purchase.
All this wouldn’t be so terrible if the definition of ‘’presence in a state’’ meant the same thing for everyone, but it doesn’t. Presence in a state can, but not necessarily, include: Head offices, offices, warehouses, resellers and even delivery routes. Each state has its own view on the matter.
Tax Web Services
Thankfully there are tools out there to help you in your tax collecting endeavor. The most convenient is probably the online tax web service. These powerful solutions have been designed for real time sale tax calculation. They are seamlessly integrated to your ecommerce solution and fit your specific business. When a customer decides to purchase one of your items, the web service kicks in and calculates the rate that needs to be applied by taking into account the shipping address, the kind of goods being sold and the states specific tax policies regarding your business and its presence in the state where the package is being shipped. These solutions are time and money saviors but are not integrated to every eCommerce solutions so be on the lookout for the ones that come with such an integration.