Online Sales Tax

Online Sales Tax: What Small Business Owners Need to Know

I’ve worked with my fair share of e-commerce companies and individuals selling their handmade products online. At some point, most, if not all of them, approach me with the same question. Do I have to collect sales tax? The answer, in true lawyer fashion, is always “it depends.”

Of course, this time, it depends greatly on the state where your business is located. Most states make businesses collect sales tax—but some don’t. So if your business is located in Alaska, Delaware, Hawaii, Montana, Oregon, or New Hampshire, you can stop reading right here. You’re exempt from collecting sales tax from your customers. Unless you have such growth that you’re expanding your distribution network by building warehouses in every state.

As we’ve seen with Amazon—which used to not collect sales tax from anyone outside of it’s home state of Washington—there is a war brewing over online sales tax collection. You see, as more and more businesses find it profitable to sell their goods online without a physical store, more and more cities and states lose out on their sales tax revenues. Which, while a good thing for the consumer since they’re saving a buck or two on their purchases, is a bad thing for the cities and states. Amazon apparently claimed for years that their very slight presence (a shipping facility) was not enough for the state to have control over their taxing. But a few years ago they became forced to collect taxes from citizens of states where there was a distribution center, including my home state of California.

For those of you with businesses in all other states, you’re most likely going to need to collect sales tax from your customers. But how much? Since I’m a California based small business attorney, we’re going to keep this California-specific. What if your business is operating out of Silicon Beach (Santa Monica, CA) or the greater LA area? At the time of this writing, sales tax in Santa Monica is 9.5% while the base CA sales tax is 8%. Which one do you charge?

While most companies would probably just charge the California tax, the answer is a little more difficult than that. And please keep in mind here that this is a very basic overview, but you’re supposed to charge the state tax rate plus the special district tax rate. As a result, if you’re in Santa Monica, you’re going to need to charge the higher tax rate to all sales in your district. But if you’re in Santa Monica and you sell your product to someone in San Francisco, then you only have to charge the California sales tax rate. Of course, there are also caveats for different types of items sold and county taxes, but that’s the general rule.

Oddly enough, although I’ve had this post calendared for a few months now, just today, Engadget posted a very comprehensive writeup about the battle going on over internet sales tax. Very topical indeed.

And on a side note, it’s been a few weeks since I’ve posted anything here. That’s because I’ve been working on a few different projects—all highly specific mini-sites designed to help elucidate the various aspects of trademark law. If you’re interested in reading any of them, here are the links:

  • A website dedicated to helping small business owners understand and respond to USPTO Office actions they’ve received as a result of their trademark applications.
  • A website dedicated to helping business owners and trademark registrants understand trademark opposition proceedings.
  • A website designed to explain, in broad strokes, how business owners can protect their brands through trademarks, trade dress, copyrights, patents, and trade secrets.
  • A website dedicated to helping small business owners understand the trademark registration process and why registering a trademark is so important in today’s international economy.

So there you have it. A quick and dirty post about sales tax and a bit of information about some other side projects I’m pursuing in my spare time. I’ll be back to my weekly posts on the Norton Law Corporation Blog for Business Owners from here on out, though.