How Do Small E-Tailers
Deal With Internet Sales Tax?
By James Maguire
Small Business Computing Magazine
January 5, 2004
FOR MORE INFORMATION CONTACT:
Jeff Baxter, Manager, Poolandspa.com
Many e-commerce businesses approach Internet sales tax the same way they face a
trip to the dentist: It's a necessary chore but it creates no warm fuzzies. And
if it can be kept to a minimum, all the better.
Currently, of course, sales tax law favors online merchants. Since e-commerce
businesses charge sales tax only on purchases made by in-state customers --
usually a small percentage of shoppers -- online retailers have an advantage
over offline competitors. But that still means that e-tailers shoulder the
accounting and logistical chore of separating in-state customers from
And looming much larger for e-commerce is a greater Net sales tax worry:
Legislation is pending in Congress that would authorize states to require sales
tax collection on Internet purchases, provided those states adopt simplified
sales tax regulations. (But merchants with less than $5 million in remote sales
would be exempt.) In other words, if the legislation passes many e-tailers will
need to collect sales tax from most of their customers, even if they are out of
While waiting for Congress to decide on Net sales tax, various e-tailers handle
their in-state sales tax collection chores in different ways, depending on their
business size and e-commerce platform.
Built-In Tax Collection
PoolandSpa.com is an Internet-only
seller of pool supplies based on Long Island, New York. Online since the
mid-90s, the site carries some 130,000 SKUs and handles 150 to 300 orders a day
in warm weather. Its 2002 revenues were almost $5 million, says founder Dan
The site collects sales tax only from New York residents, which comprise less
than 10 percent of its customers, Harrison says. PoolandSpa has built its own
proprietary e-commerce engine, which is programmed to charge New York state
sales tax to purchasers with in-state zip codes.
"If you're in a location we have to collect from, it shows up on your receipt
automatically," Harrison says. "Then it goes into our costing system, and we run
a taxable and untaxable sales report. Say we had a million dollars of
transactions, and our taxable transactions were a hundred thousand dollars; we
owe the state $8,750 dollars."
Adding a headache to the process, he says, is that New York now requires
PoolandSpa.com to file sales taxes on a monthly rather than quarterly basis,
because the site's revenue has surpassed a set limit. "It stinks even worse,"
"Now that we've opened up a Nevada
business, we're going to have to do another report that shows all of the Nevada
[in-state] sales," he says.
Harrison says that sales taxes have not been a major factor in his customers'
buying decisions. The site's average selling price is between $86 and $123
dollars — not enough to generate substantial sales tax. "Now if you're buying a
whole hot tub equipment pack and it's going to be $1,600 dollars ... I'm sure
there are people it would make a difference to, even if it's only $80 or $90
dollars [in taxes]."
Harrison, like many e-commerce owners, is vehemently against additional sales
"If all of a sudden you made us collect sales tax in the 50 states, we would
have to hire a full-time employee to do that," he says. "Even if we could
automate all of the numbers, we'd have to sit there and fill out 50 forms once a
month — that's unbelievable. So I think they're never going to get [the
legislation] passed because it would just affect too many companies and be too
Stand Alone Solution
MyFamily.com is one of the Internet's leading genealogy research sites. The
site's database contains a wealth of family records culled from census reports
and historical archives, which it sells on a subscription basis. Based in Provo,
Utah, MyFamily.com also has nexus (physical location) in California, so it
collects sales tax on the hard goods it sells in these two states.
Before the company had California nexus, its Net sales tax collection was
relatively simple, says Todd Johnson, MyFamily.com's executive director of
finances. A customer purchase generated a locational query, and an in-house
program calculated sales tax for Utah residents.
When MyFamily.com opened its California location, collecting sales grew
considerably more complex: the nation's most populous state has a bewildering
array of tax codes among its many counties and municipalities.
To handle the complexity, MyFamily.com installed the Taxware software. "We
hooked that up to our front end capture system and set up rules that attach a
flag to each product saying this is taxable or non-taxable. Then we set up a
flag based on the address of the purchaser to determine whether it's taxable or
not taxable," Johnson says. "And if it is, then the system automatically applies
the rates that are in Taxware and authorizes the full amount of the order while
the customer places it."
The advantage of Taxware is that it keeps track of the blizzard of different
sales tax regulations. "We don't need to have a specialist that is reading all
of the sales tax codes and watching any new ordinances that are passed," Johnson
says. The software is updated on a regular basis with current tax code
Sales taxes don't significantly impact customer-buying decisions at MyFamily.com,
says spokesperson Mary-Kay Evans. The items that are taxed are add-ons to
subscriptions, says Evans. "If you love genealogy, you're going to order this
The Mom and Pop Shop
Nelda Cardenas and her husband Richard own and operate Cardenas Vintage
Clothing, based in San Antonio, Texas. Online since 2001, the business has a
simple and low cost method of handling Net sales taxes.
Whenever a customer with a Texas address places an order, Richard runs the order
through the business's cash register, which computes state sales tax. Customers
are then sent a confirmation e-mail with the total (including sales tax) and
estimated delivery time.
"They have the opportunity to say 'I don't want to pay the tax,' but it really
hasn't come up," Richard says. "It's understood: our order form indicates that
Texas residents are obligated to pay that."
The only in-state customers the site doesn't charge sales tax are resellers;
these buyers are exempt. (Clothing shops in Austin, catering to that city's
college crowd, sometimes buy from Cardenas.) Resellers must provide a tax ID
Richard also admits that sales tax has had little impact on the overall
business. However, Nelda says, voicing an opinion common among small online
entrepreneurs: "When legislation is passed and every state has to charge taxes,
it could be a nightmare for small businesses because of all the paper work."