From the April 2001 issue of Entrepreneur

Q: My business sells health products on the Net. I've heard I don't have to pay sales tax if a customer is outside my state or in another country. However, I've also heard sales tax may be due for sales made in the state where my Web site hosting company is located. Is that true? My office is located in California, and my host server is in Utah.
Kelly Suzukawa
Via e-mail

A: You're asking the right questions, because one thing you don't want to do is get behind in collecting and reporting sales tax. The 1998 federal moratorium now in effect only prohibits new taxes on e-commerce; businesses must still comply with existing sales tax requirements. That means you're required to report and pay sales tax on sales to customers in your own state-in your case, California. You must also report sales to out-of-state customers to California's Board of Equalization, but you're not required to pay any tax to California on those sales.

If your business grows and you have a manufacturing facility, a store, a warehouse or even a sales office-in other words, a physical presence-in another state, you're also obliged to pay taxes on sales to customers in that state. When a business has enough of a physical presence in a state, it's said to have a "nexus" there. So does having your Web hosting service in another state amount to a nexus?

The answer to this varies from state to state, so it could be something to consider when deciding on a Web hosting serv-ice. For example, a Web server in Virginia would not, by itself, create a sales tax obligation for sales in Virginia. Because it doesn't appear Utah has ruled on the nexus question, the best way to find out whether there is a policy is to contact the office responsible for collecting sales tax, i.e., the Utah State Tax Commission (801-297-2200).

Another problem is that tax rates can differ from county to county and city to city in the same state. For example, in Utah, the state sales tax rate is 4.75 percent, but counties and cities can and do add differing amounts to that state rate. The rate of tax collected on online sales usually depends on the location of the customer, so sellers are required to collect tax based on customers' local sales tax rate. While you can determine those rates on the Web (use the sales tax calculator at http://thestc.com/RateCalc.stm), this is a burden few small businesses want to undertake. For those to whom this is a serious concern, Electronic Commerce: Taxation and Planning (Warren Gorham & Lamont) by David E. Hardesty covers this and other issues. But because the book costs $200, you may want to do some research on your own before investing in it.


Small-business experts Paul and Sarah Edwards' latest book is The Practical Dreamer's Handbook(Putnam Publishing Group). Send them your start-up business questions at www.workingfromhome.com or send them in care of Entrepreneur.