The Impact of Sales Tax on E-Commerce

A sales tax is a consumption tax charge dat the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. The can be included in the price, called "tax-inclusive", or can be added at the point of sale, called "tax-exclusive".

In recent research, Austan Goolsbee, an associate professor of economics at the University of Chicago Graduate School of Business, examines the effects of sales taxes on e-commerce. The central issue of sales taxes is a a criticall one. In the current tax-free e-commerce world, consumers do not pay slaes tax, which directly affects the price of goods on-line. "Charging sales tax is the same as increasing the price of a product or service," says Goolsbee. "If you increase prices, people will stop buying." If sales taxes were charged, according to Goolsbee, Internet retail sales could decrease by up to 24 percent. Therefore, businesses looking to expand their markets need to think twice before setting up shop on-line. Given the current tax situation, retail companies that feel the need to establish an on-line presence will not benefit from integrating their operations, says Goolsbee.

Under current state laws, companies are not required to collect sales taxes from consumers making out-of-state on-line or mail order purchases. Payment responsibility falls solely on the customer and enforcement is difficult, creating a de facto tax-free environment.

Wal-Mart, the nation's largets retailer, announced in January the spin-off of Wal-Mart.com. The new company, jointly owned with Accel, is an independent e-commerce retail entity. By establishing a separate company, with physical operations only in California and Arkansas, Wal-Mart will be able to avoid collecting sales taxes for most of its on-line transactions.


Tax Tips on Sales

If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.

Consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax.

Nevertheless, for right now, all you need to worry about is collecting sales tax from customers located in the same states as your locations. If an Internet-wide tax bill is passed, there are other ways that you can entice your customers to purchase your products, such as offering an equivalent discount, free shipping, or free gifts.

How Long to Keep Tax Records

When it comes to keeping tax records, a lot of people are unsure of the proper amount of time to hold particular information before disgarding it. Some people will keep all records permanently, but this can be more of a hassle than anything else...and things do tend to get lost in the clutter. So how long should you hold onto your records? Here is a list of seven different situations and the length of time you should hold onto your records for.

1. You owe additional tax and situations (2), (3), and (4) below, do not apply to you; keep records for 3 years.

2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.

3. You file a fraudulent return; keep records indefinitely.

4. You do not file a return; keep records indefinitely.

5. You file a claim for credit or refund after you file your return; keep records for 3 years from the date you fild your originial return or 2 years from the date you paid the tax, whichever is later.

6. You fild a claim fo ra loss from worthless securities or bad debt deduction; keep records for 7 years.

7. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Minimizing Your Audit Risk

An audit can be scary for anybody who has experienced them. In order to avoid an audit it is essential to understand what causes them to occur. This blog serves as an overview of what can cause an audit and how you can prevent one.

2008 IRS Audit Statistics

How often does a business / individual get audited? Here are the stats from 2008.

• Simple Individual Returns - 0.4%
• Individuals with Rental Properties or Unreimbursed Employee Expenses - 1.3%
• Sole Proprietors Earning less Than $25,000 - 1.2%
• Sole Proprietors Earning Between $25,000 and $100,000 - 1.9%
• C-Corporations - 1.0%
• S-Corporations and Partnerships - 0.4%

Why Do Returns Get Audited?

Each return is examined by a computer. The computer uses a program called Discriminant Inventory Function (DIF) System which assigns a score to each individual return that helps assess the likelihood that an audit will lead to a tax change. Details of this scoring system has not been made public by the IRS.

What Causes Red Flags?

While the DIF system scoring remains a secret, there are still known factors that can cause an audit including:

• Incomplete or Illegible Returns
• Mathematical Errors
• Income Other than Basic Wages
• Unusually Large Charitable Donations
• Large Casualty Losses
• Low Income and High Deductions
• Claiming Dependents Other Than Children
• Hobby Losses
• Large Business Meal and Entertainment Deductions
• Excessive Business Auto Usage
• Home Office Deduction

How to Avoid Red Flags

Make sure that you are honest. This might sound like an obvious tip, but it is not uncommon for business and individuals to keep an income source a secret to avoid additional taxes. Make sure you report cash prizes and alimony. Keeping good records is also vital. Remember, the IRS has up to three years ot audit your return so save all of your information. Additionally, use EXACT amounts. Never round off any numbers.

Tax Preparation Tips

MSN released an article back in January that serves as a 15-point tax-return checklist. Although filing your tax return is probably the last thing on your mind right now, it is always good to be prepared well in advanced.

You can read the full article here: http://articles.moneycentral.msn.com/Taxes/PreparationTips/DoItRightYour15pointTaxChecklist.aspx

This is a highly valuable checklist and often stresses that if this too much to handle you should seek help from a professional.

I recommend checking out this informative article when you have some downtime. As always, you can ask the experts at The Tax Club for a free consultation.

The Tax Club

The Tax Club is an innovative financial firm that specializes in personalized tax plans for both the individual and small business owners. When you become a member of The Tax Club, you benefit in a variety of different ways including:

• Unlimited year round access to a Personal Tax Advisor.
• Evaluation and implementation of an in depth tax reduction strategy for the current & upcoming tax year.
• Corporate and personal tax preparation, and ease of access to all pertinent tax data.

The purpose of this blog is to provide you with some valuable insight on The Tax Club and information pertaining to the tax industry. The main purpose, however, is to help deliver immediate benefits to YOU.