Fun with sales tax

23 March 2009 by Jeremy WhiteJeremy White

I've been distracted this past week because I've been dealing with a sales tax audit. It turns out to be a fascinating glimpse into some of the collisions between a web-based business and the more traditional government processes.

Because our only significant office is here in Minnesota, we pay sales taxes only in Minnesota. And because Minnesota is a relatively small portion of our sales, we're just not talking about a ton of money, or a major issue.

Nevertheless, we've always worked to pay our sales taxes honorably, and I thought we did a pretty good job.

A nice auditor from the State of Minnesota has been gently helping me to see how wrong I was. You see, it turns out that the 'location' of a particular transaction is not as simple as I thought. I thought that it was just based on our office; that would mean we'd collect Minnesota tax, St. Paul tax, and another Twin Cities transit tax (in short, a single, easy to calculate tax).

But it turns out that, even though we're selling a purely digital product, we're supposed to tax people based on where the product is delivered to. And, to make it even more fun, the only way to figure out the tax for a given transaction is to look at the 9 digit zip code, not the 5 digit zip code we've been collecting all this time. So we have to grind all this info and figure out which of 25 different local tax zones we have to pay. Heaven forbid we should fail to deliver the $2.54 we owe the city of Duluth, for example.

But what a nasty collision: I want to build a simple web store to collect money so I can help pay people to improve Wine so people aren't forced to use Windows. But governments, particularly right now, are very interested in collecting every single penny they can. They don't especially care if it causes me heartburn. Now, to be fair, I have to admit that educating children and paying fire fighters is slightly more important than freeing the world from Windows.

Fortunately, market capitalism is alive and well. It turns out that there are at least four separate companies that provide a web-based service to companies just like mine. We can hook into a single web api, and then they promise to deal with all of the complexities of sales taxes.

So hopefully we'll get that figured out here quickly, settle up our back taxes, and I can resume my delusion that we're paying our taxes honorably. And, more importantly, I can get back to cracking the whip on Quicken, because we've got Quicken users to save...

Cheers,

Jeremy

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David.
David.
Posted 2009-03-24 17:23
This is very odd. I oder stuff on-line all the time and the sales tax is calculated on where the product ships from not to. I've heard NY is planning on instituting a law that would allow them to collect sales tax on online purchases made to out of state entities, but I haven't heard that the law passed. And the way that law is structured is very precise to avoid a no taxation without representation bit, something like if they advertise or are partnered with advertisers in NY then they pay taxes, but don't quote me on that.
I wonder if this is a new law. Under what law do you have to pay sales taxes on where the product goes to?
Jeremy White
Jeremy White
Posted 2009-03-24 18:19
What you're referring to is the law on a state by state basis.  So we charge no sales tax to anyone outside of Minnesota.  What we're working on is how we charge sales tax for folks inside Minnesota.  And in that case, we have to charge based on the city they live in (because different cities have different sales tax rates here, sadly), not based on our home city, which I'd prefer.

Cheers,

Jeremy
Derek Anderson
Posted 2009-03-26 12:36
All I can say, is HAHAHAHA.... Taxes... :(
Brian Vincent
Posted 2009-03-27 10:39
I always wondered why more people don't host their ecommerce in Montana - we don't have a state sales tax at all.  We hardly have a city sales tax either (it only applies in a few "resort" locations).  What's really funny is when I travel now it bothers me that the items on the McDonald's Dollar Menu cost something like $1.06 and not $1.
Sarah Fish
Sarah Fish
Posted 2009-03-28 16:10
Sounds a lot like New York State, which is even more complicated than Minnesota. And New York is filing lawsuits to make companies based in other states collect NYS sales tax.  
Paul Bransford
Paul Bransford
Posted 2009-03-30 17:36
I'm sure that, if needed, you can ask us for our full zips. Heck, you can even ask me to pay you any taxes I owe ya!
Charlie
Posted 2009-04-06 19:42
I ran into the exact same issue with Oklahoma.  ZIP+4 and all - though nobody really keeps track of their own ZIP+4 and Oklahoma will grudgingly accept plain ZIP in a pinch.

Apparently it's practically standard in most states, but very few if any shopping cart kits take this into account.  Taxes have to be collected based on destination, not source.  This nonsense has kept my borderline-hobby craft business from having any meaningful online sales presence for about 2 or 3 years now.

Oklahoma has an exception for purely digital download-only products.  No tax there.  But if the digital product passes to the customer on CD, or with any other tangible materials, the usual tax rules apply.

A CPA that I talked to a few months ago said to specify that the shipment is "FOB source location" (pass formal title to the customer on my own doorstep) and just collect my local rate.  Apparently that argument doesn't fly with your auditor.  Or you aren't using the right magic words on your invoices.  Check with a CPA and/or a tax lawyer.

Letting states charge sales (or "use") taxes on genuinely interstate transactions is unconstitutional in my opinion.  But a little thing like the constitution doesn't keep them from trying.  Almost all states that have a sales tax also have a matching use tax, to be reported voluntarily by each customer (HA HA HA).  The moment any state where I have no physical presence requires me to collect use taxes is the moment that I stop selling to anyone in that state.

So who does the online sales tax services?  How much do they charge?  So far the only one I've found costs way too much for a little business like mine.  Also I don't like their butt-kissing "we love to help the government collect their taxes" attitude.
Jeremy White
Jeremy White
Posted 2009-04-06 19:47
Charlie Posted:
So who does the online sales tax services?  How much do they charge?  So far the only one I've found costs way too much for a little business like mine.  Also I don't like their butt-kissing "we love to help the government collect their taxes" attitude.


There is an interesting effort here:
http://www.streamlinedsalestax.org/
That tries to simplify these things.  They list 4 certified providers; we're going to give Exactor a try - their interface and pricing seemed clean and simple.

Cheers,

Jeremy
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