Sales Taxes on Online Sales

I'm building an online store. I keep reading about sales tax calculation. Do my customers have to pay taxes? How does this work, since I live outside the States?" -- Maher Moghrabi

Two types of taxes are commonly charged on Internet sales -- VAT (Value Added Tax, in Canada, Europe, and some other areas) and sales tax (levied by some states, counties, and cities in the US). However, some products (such as electronically delivered goods) may be exempt from taxes in certain states and countries. A merchant who has a business in only one state of the US is currently not required to collect sales tax on sales made outside his state. Members of the European Union (EU) are currently required to charge the VAT on sales. To find out what tax laws govern sales of goods from your country, you'll need to contact the appropriate taxing agencies.

But this picture threatens to become much more complex for online merchants, due to two changes that are in the works:

• US Sales. In the US, some large Internet retailers are now collecting sales tax on sales to buyers in any state that has a sales tax, this in exchange for amnesty for the retailer on any past uncollected taxes. At present, 34 states and the District of Columbia are agreeing to the Streamlined Sales Tax Project (SSTP), designed to simplify tax collection for merchants. After the states approve the SSTP, then the US Congress must also approve, but approval, if it comes, may be a year or two away. Initially, I expect that only larger online merchants will be required to collect sales taxes for other states, though eventually, this may be required of smaller merchants, too.
• European Sales. The EU recently passed a law requiring merchants outside the EU to assess VAT on sales of digitally delivered goods to buyers in the EU. This is supposed to minimize the tax disadvantage EU merchants currently face, since they are currently required to assess the VAT, making their total prices higher than non-EU merchants. This law raises a number of legal questions by requiring VAT collection by foreign merchants, so it may take a while to sort out all the issues.

If the non-resident tax collection trend continues, I expect that merchants may eventually need to use a third-party service like Taxware.com (http://www.taxware.com) to handle tax calculations and interface with state and national governments. You can read more about these pending taxation issues from article links on the Taxware site (http://www.taxware.com/news/articles/) and in the E-Commerce Tax Collection section of the E-Commerce Research Room (http://www.wilsonweb.com/cat/).