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.