From the August 2002 issue of Startups

Q: I just received a huge order from a company in California. I am in Pennsylvania. Do I charge this company sales tax on their order? My business is mostly Internet-based.

A: Until at least October 2003, sellers like you are not responsible for collecting sales tax from buyers in other states in which they do not have a physical presence, thanks to the Internet Tax Freedom Act. A physical presence means having an office, a factory, a store or a warehouse in that state.

FAST FACT
A recent survey of online shoppers by Active Research indicates a majority would shop less if Internet sales were taxed. A useful site for keeping up is www.ecommercetax.com.

Nevertheless, your customer may owe California the equivalent of what it would owe in sales tax, but that company--not you--would be responsible for paying California, and the tax owed would be called a use tax. Most of us have not seen a use-tax form or sent a check along with it, but state laws say we should be doing this. The states would love to collect this tax revenue, estimated to be $20 billion in missed taxes by 2003, but most find it too costly to pursue residents who don't pay it. States do collect use taxes on high-priced items like cars, mobile homes, boats and airplanes that are purchased in other states because they learn about them through their need for a license, title or registration.

Will Congress extend beyond 2003 the Internet Tax Freedom Act that keeps you from having to be a tax collector for other states and from placing new taxes on Internet services? Because there are 7,500 different sales tax rates around the country, Congress seems to have recognized--at least for now--that it's an unreasonable burden on a small business selling over the Internet to figure out and pay taxes all over the country.

But the states are joining forces to simplify their sales taxes, making them uniform in some respects. Of course, getting 45 states to agree is only a tad bit easier than herding cats. Still, as sales on the Internet grow by the billions, state and local governments will be missing out on tax revenue that pays for things like police and schools. The stakes are becoming so big that, to keep their services afloat, the states will eventually get their act together and Congress will have to end the moratorium. So keep your eyes open for future developments, because it will affect your bottom line.


Paul and Sarah Edwards are the authors of several homebased business books, including Working From Home. Their latest book is The Entrepreneurial Parent.