A looming sales tax-collection crisis

Posted: 7/11/2006 (Original Article Link)

BizBest: Daniel Kerher Dear Business.com: In the past two years, we've turned aggressively to the Internet to sell our products and services. Now we have customers in almost every state. As we expand our business and online sales, however, we only grow more confused about sales tax collection requirements. What's going on? -- Sales Tax Terrified

Dear Sales Tax Terrified: Welcome to the sales tax jungle. It would take a month to explain America's Byzantine system of "sales and use taxes" and how it will ultimately apply to online sales, but here are the highlights you should know.

Sales tax is added to the cost of a product or service and paid by the customer. Business owners like you are responsible for collecting these taxes and sending them to the proper authority. New businesses must register with the state to collect sales tax.

Goods bought from manufacturers or wholesalers for resale are exempt because the retail customer will pay sales tax. This is a "resale exemption."

"Use" taxes generally apply to un-taxed sales of tangible personal property bought from a business in another state and shipped to the user's state. Buyers are generally responsible for paying, but rarely do.

If you have a business presence in another state, such as an office, retail location, warehouse or distribution facility, you must collect sales tax from online sales to customers in that state.

But here's the looming crisis: Current practice that excuses most sellers from collecting sales tax from out of state buyers is changing. For starters, a powerful but little-known multi-state effort called the Streamlined Sales Tax Project (SSTP) is pushing through changes that will require collection of sales tax on goods sold over the Internet or through the mail. Some small business tax experts are calling SSTP the "stealth" sales tax initiative "" a potentially invisible killer.

More scary stuff: At last count, 45 states, 4,696 cities, 1,602 counties and 1,113 other tax jurisdictions in the U.S. impose a sales tax of one type or another "" almost 7,500 total taxing entities. And last year these jurisdictions made a total of 3,000 changes in rates and regulations.

Meanwhile, state governments are getting more aggressive in auditing businesses selling across state lines. Many also are changing the rules for what makes a business liable for charging sales tax.

A Pre-Emptive Strike

As a result of the online sales tax collection chaos, small businesses by the thousands are rushing to head off trouble before it starts. Many are turning to providers of on-demand, Web-based sales tax compliance services.

Avalara Inc. is one such service that specifically targets the sales tax collection and information needs of small business, and its sales are skyrocketing "" up 600 percent in the last six months. Scott McFarlane, president, says he's signing up 500 to 700 new small business users monthly.

Avalara -- an SSTP-certified vendor -- offers online solutions that make it simple for even a one-person business to compute and collect sales tax from anywhere in the country. The service integrates with Quicken and most other small business accounting packages, and costs at little as $9.95 per month. Plus, as an SSTP-certified vendor, Avalara -- not your business -- is responsible for the accuracy of the tax collections and remittances. They cover any mistakes.

The firm's product line includes the fully-automated AvaTax sales tax management service, as well as the free AvaRates Now online rate lookup service and sales tax services exclusively for ProStores, an eBay company that helps small businesses set up low-cost e-commerce sites.

With TaxRegions Online, ProStores merchants specify the states into which they sell, and upload sales tax rates for use during the shopper's checkout process. The entire process is fully automated and fast.

Daniel Kehrer (editor@business.com) is Editor at www.Business.com, the leading business search engine.

Daniel Kehrer -- whose column runs every Tuesday on the Small Business page -- is the editor of BizBest (www.bizbest.com), which rates and analyzes small business resources and publishes ad-free solutions directories; dan@bizbest.com.