Sales tax update: Main Street vs. Online Retail

Publish Date: 
Jan 22, 2013
By Mark E. Battersby

MANY POWERSPORTS RETAILERS face increased pressure to collect sales taxes by revenue-strapped state and local taxing authorities, all-the-while battling competition from Internet merchants that, in many cases, are not required to collect sales taxes. 

And don’t forget, when those same powersports businesses attempt to avoid the bite of sales tax with their own out-of-state or Internet purchases, they are confronted with the often-ignored, but increasingly enforced “use” portion of the sales and use tax conundrum.

Overlooked and misunderstood, sales taxes rank high among the most annoying taxes a retailer must deal with. A sales tax is a tax on consumption where a certain percentage is added onto the price of goods and/or services.

Sales tax collection would be far easier if the tax was on total sales without exceptions, exclusions or exemptions.

As bad as sales taxes are for business owners and managers, their appointment as collectors of those taxes may weigh the heaviest.  Where required, a powersports retailer must by law not only collect sales taxes on the goods, products -– and, increasingly, services – sold, but it also must remit the amounts collected to the state.

A powersports dealer with a physical presence (i.e. storefront)  finds collecting sales taxes pretty much a straightforward proposition. A customer is charged the sales tax required by the jurisdiction where the business is located. If, however, the dealer begins selling its products online, does that mean that it charges customers the same sales tax rate as those who come into the store?

If the powersports business has a physical presence in a state, such as a store, office or warehouse, it must collect state and local sales tax from customers at the rate effective in that jurisdiction.  Without a presence in another taxing jurisdiction, the business is not required to collect sales taxes.  In legal terms, this physical presence is known as a nexus.

Unfortunately, each state defines nexus differently, but all agree that if a business has a store or office of some sort, a nexus exists. This rule is based on a 1992 Supreme Court ruling in which the justices ruled that states cannot require mail-order businesses and, by extension, online retailers to collect sales tax unless they have a physical presence in the state.

The exception to the rule: While sales tax is not imposed on goods or services meant for resale, sales tax collection would be far easier if the tax was on total sales without exceptions, exclusions or exemptions. Exceptions are usually made for sales to resellers, either wholesalers or retailers, which have valid state resale certificates.

Another exception to the general sales tax rules involves sales made to tax-exempt institutions, such as public schools and libraries. In general, sales taxes do not have to be collected on sales to tax-exempt or other exempted organizations. Further complicating matters, in some states sales taxes apply only to products, while in other states sales taxes apply to services as well.

INTERNET SALES BATTLES. Originally intended to keep the states from taxing catalog and Internet sales, the so-called nexus rule lets many franchised and independent dealers off the hook for collecting sales taxes from neighboring jurisdictions where their customers are located.  That nexus rule has also proven to be an attractive selling point for powersports businesses located in states that border high sales tax jurisdictions.

Not too surprisingly, the tax authorities in most states would like to see sales taxes collected from their residents regardless of where the sale occurs. The first step taken to overcome the U.S. Supreme Court’s ruling was the creation of a unique multi-state pact simplifying the nation’s sales tax laws. On Oct. 25, 2005, the Streamlined Sales and Use Tax Agreement went into effect.  The Streamlined Sales and Use Tax Agreement has simplified sales tax rules to encourage retailers to voluntarily step up to calculate, collect and remit the taxes owed by their customers. (continued)