What's Your Problem?

Entrepreneur, April, 2001 by Paul Edwards, Sarah Edwards

TOO TAXING

Online sales taxes: How much and who gets it?

QUESTION: My business sells health products on the Net. I've heard I don't have to pay sales tax if a customer is outside my state or in another country. However, I've also-heard sales tax may be due for sales made in the state where my Web site hosting company is located. Is that true? My office is located in California, and my host server is in Utah.

Kelly Suzukawa

Via e-mail

ANSWER: You're asking the right questions, because one thing you don't want to do is get behind in collecting and reporting sales tax. The 1998 federal moratorium now in effect only prohibits new taxes on e-commerce; businesses must still comply with existing sales tax requirements. That means you're required to report and pay sales tax on sales to customers in your own state--in your case, California. You must also report sales to out-of-state customers to California's Board of Equalization, but you're not required to pay any tax to California on those sales.

If your business grows and you have a manufacturing facility, a store, a warehouse or even a sales office--mother words, a physical presence--in another state, you're also obliged to pay taxes on sales to customers in that state. When a business has enough of a physical presence in a state, it's said to have a "nexus" there. So does having your Web hosting service in another state amount to a nexus?

The answer to this varies from state to state, so it could be something to consider when deciding on a Web hosting service. For example, a Web server in Virginia would not, by itself, create a sales tax obligation for sales in Virginia. Because it doesn't appear Utah has ruled on the nexus question, the best way to find out whether there is a policy is to contact the office responsible for collecting sales tax, i.e., the Utah State Tax Commission (www.tax.ex.state.ut.us, 801-297-2200).

Another problem is that tax rates can differ from county to county and city to city in the same state. For example, in Utah, the state sales tax rate is 4.75 percent, but counties and cities can and do add differing amounts to that state rate. The rate of tax collected on online sales usually depends on the location of the customer, so sellers are required to collect tax based on customers' local sales tax rate. While you can determine those rates on the Web (use the sales tax calculator at http://thestc.com/RateCalc.stm), this is a burden few small businesses want to undertake. For those to whom this is a serious concern, Electronic Commerce: Taxation and Planning (Warren Gorham & Lamont) by David E. Hardesty covers this and other issues. But because the book costs $200, you may want to do some research on your own before investing in it.

THE POWER OF ONE

Checklist for doing business alone

QUESTION: I'm starting a business at home and have no one else working for me. Am I required by law to obtain an employer identification number (EIN) to begin with? What stipulations are required if I sell a service from home?

Bobbie Thrift

Haboken, Georgia

ANSWER: As a sole proprietor without employees, you're not required to get an EIN, but it's a good idea for several reasons. First, you may employ someone else sooner than you expect, and second, using an EIN instead of your Social Security number when you invoice payments makes your business seem more professional. You use Form SS-4 to apply for an EIN. For details, go to www.irs.gov/prod/bus_info/pub1635.html#Apply, or see IRS Publication 1635, Understanding Your EIN, or Publication 583, Starting a Business and Keeping Records.

Other legal steps you need to take include:

* Checking your zoning and homeowner restrictions on homebased businesses. You may also need a city business license.

* Obtaining a seller's permit (aka Certificate of Authority and Resale Certificate) from the agency in your state that administers the sales tax.

* Filing quarterly estimated federal and state taxes if your state has an income tax.

Don't be put off by those legalities. Getting your business off to a sound start helps build a necessary foundation for success.

Small-business experts Paul and Sarah Edwards' latest book is The Practical Dreamer's Handbook (Putnam Publishing Group).