"Tax All Internet Businesses" - What You should Know | Chris Malta's EBiz Insider Podcast

Chris Malta's EBiz Insider Podcast

Every couple of years, somebody somewhere does something that brings the idea of an Internet-wide sales tax back into the news here in the US.

This naturally causes people to freak out left and right. Why? Because most people are seriously misinformed about why this might happen, how it might happen, and what effect it may have on home-based ECommerce businesses.

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EPISODE TRANSCRIPT

Welcome to Chris Malta's EBiz Insider Podcast, where the TRUTH about ECommerce is WHERE WE LIVE.

Every couple of years, somebody somewhere does something that brings the idea of an Internet-wide sales tax back into the news here in the US. Whether it's a court case against a large retailer, a State government looking to raise even more tax revenue they can spend inefficiently, or any number of other triggering issues, the idea of a nationwide Internet Sales Tax in the United States rears it's ugly head over and over again.

This naturally causes people to freak out left and right. Why? Because most people are seriously misinformed about why this might happen, how it might happen, and what effect it may have on home-based ECommerce businesses.

So let's set the record straight and look at this with a common-sense perspective instead of the intentional fear-mongering created for a variety of specific agendas, none of which are to your benefit as a business owner.

I do have to state for the record that I'm not a lawyer or an accountant, so I'm not giving you legal advice here. This is my personal opinion based on what I've seen in more than 40 years in business overall. As a long-time business owner in various large industries, I have an experienced personal perspective that most HOME-based business owners DON'T have.

The first thing you need to understand is WHY this issue keeps coming up.

It's simple, really. Let's use an example.

Somebody in South Dakota buys a product online. The website that sold the product to that person is based in Florida. Since the seller is in Florida, they're not required (or allowed, under current law) to collect sales tax on that South Dakota sale. So the buyer in South Dakota gets to buy something without paying sales tax.

The government officials in South Dakota don't like this. "What?!" they exclaim. "Somebody who lives in our State actually bought something without paying US for the privilege of buying it?? How dare they!"

This is a common theme with many US States. They complain that they're losing tax revenue because their residents are buying things from across state lines without paying sales tax to their home State. They would much rather have all of their residents buy things ONLY from stores in their own States, so they don't miss out on a dime of that sales tax. Well, that simply isn't going to happen as much as it did decades ago. This is the 21st Century, and things are a changin'.

To be fair, though, you CAN see their point. Sales tax revenue is one source (out of MANY sources of tax revenue) that provides states with hundreds of millions of dollars that they use to maintain infrastructure, provide services to their residents, spend wastefully on ill-conceived projects, you know...like States do with tax money.

But to BE fair, you have to look at the OTHER side of the issue as well. Business that reside in other States LEGALLY CANNOT collect sales tax for states they don't RESIDE in.

So the ECommerce website owner in Florida couldn't collect sales tax from that customer in South Dakota even if they WANTED to. That's because in any State in the US, a business can only collect sales tax in a State that they actually have a PHYSICAL PRESENCE in. That's called a "business nexus".

If the website owner in Florida ALSO actually had a physical warehouse or other presence in South Dakota, then that Florida website owner would be REQUIRED to have a South Dakota State Sales Tax license, and collect sales tax on sales made to South Dakota residents.

But with home-based ECommerce business owners, that's virtually NEVER the case. Home-based business owners are licensed to collect sales tax in their OWN State, where they DO actually reside and have a physical presence, but they CAN'T collect it from residents of OTHER States.

And of course it's not just South Dakota. That's only an example. We're talking about 45 STATES in the US that actually do have sales tax. So in order to collect sales tax on every sale that a home-based business owner makes in the US, that business owner would have to have a physical presence in ALL 45 of those States, and be licensed to collect sales tax in all of those 45 States!

That will NEVER happen.

THIS is what you're told that the Internet Sales Tax proponents want to change. You hear that they want to come up with some kind of Federal law that requires online sellers to charge sales tax in every State, and makes it somehow LEGAL for online sellers to charge sales tax in States where they don't have a physical presence.

HOWEVER, even if the Feds DID somehow make it legal for that to happen, there are over TEN THOUSAND sales tax jurisdictions in the US! Sales tax rates change by State, County and often even Cities and Municipalities. States have a basic sales tax rate, and then Counties and Cities can add more sales tax on top of the State rate. So of course, they DO.

Can you imagine, as a small business owner, having to figure out exactly how much sales tax to charge your customers all over the country in more than ten thousand sales tax jurisdictions? It would be literally impossible to do that on your own.

So let's look at where we are so far in all this mess as it relates to a home-based business owner.

FIRST, the Feds keep talking about requiring all online businesses to charge sales tax to all their customers and pay that tax correctly to the State where EACH customer lives.

But SECOND, you CANNOT LEGALLY COLLECT sales tax from customers outside your State.

And THIRD, even if you could, you could NEVER figure out on your own how to properly charge customers in all those ten thousand-plus jurisdictions (that, by the way, are constantly changing).

All right, we've got that established. Now let's talk about WHY the States keep bringing this up, and the Feds keep talking about it.

It's not YOUR business they're concerned with. This is a result of companies like Amazon and eBay, as well as national big-box stores. Earlier, I talked about what a busines nexus is. When a company has a physical presence in a State, they're required and licensed to charge sales tax to customers in that State.

But when they DON'T, they're NOT. There are lots of big-box stores that DON'T have physical locations in ALL States, but still SELL to all States nationally online. These are companies that do hundreds of millions of dollars in sales every year. So you can see why the States are frustrated when they're losing all that potential tax revenue from the big-boxers who aren't physically in their States.

eBay is mostly people selling to other people, but it's a LOT of people selling to other people. Strictly speaking, eBay sellers CANNOT collect sales tax outside of their own States, so there's that as well.

Then there's Amazon. The online retail store that wants to swallow the world. Amazon DOES pay sales tax in all States for items that come from THEIR OWN PRODUCT INVENTORY. But they do NOT charge sales tax on products that come from the huge number of individual home-business owners that sell through Amazon's web site.

That's a large amount of money.

So this "Tax the Internet" push is always primarily about Amazon, and to a lesser extent, the big-box stores and eBay. It's NOT about YOU, the home-based business owner.

As long as you don't sell on Amazon, which is a really bad idea to begin with for many other reasons.

Still, you hear about it over and over again, and naturally it worries you. The talking bubbleheads on the news channels predict doom and gloom for small businesses, people who CLAIM to be internet gurus try to sell you useless solutions to paying taxes you still don't have to pay, and around and around we go.

The LAST thing we need to talk about here is the fact that home-based business owners worry that people won't buy from them if they ever have to charge sales tax. That's ridiculous. Sales tax is a fact of life, and most online buyers don't even notice it. The very few who do are not the customers you want anyway, because they're bargain hunters and bargain hunters are a retail business's worst customer. So if you ever do end up having to charge sales tax, that means everybody else does too, and it won't matter to your sales.

So here's the bottom line:

1. As a home-based business owner, as of this date you do not have to, and CANNOT pay sales tax to States other than where you are located. So you don't collect it for other States.

2. The Tax the Internet push is about the Amazon and the big-box stores, not about you.

3. If the Feds ever do find a way to tax all sales online, they will most likely exempt smaller home-based business that don't make millions of dollars a years.

4. If you DO somehow end up having to charge sales tax to all your customers, so will everybody else, so it won't affect your sales.

In business, you'll learn over time that rules and regulations come and go. Things change. But the one thing that never changes is that business goes on no matter what happens, and yours will too if you don't let the changes freak you out.

And if Tax the Internet ever DOES come to pass for home-based business, don't worry about figuring out the ten thousand different tax rates. Somebody will come up with a App that actually works and makes it simple. The State governments that want the tax money will make SURE of THAT.

For much more highly experienced and incredibly insightful info about the ECommerce world, check out my FREE EBiz Insider Video Series at Chris Malta.com.

Thanks for listening, and I'll catch you next time.