The ABCs of Online Sales Tax Find out exactly what you should be charging--and paying--when conducting business online.

A reader sent in the following question to me recently inregards to sales taxes on online sales:

"I buy a lot of stuff on the internet for my business.Recently I bought something in an online auction, and when theseller sent me his invoice, he added my state's sales tax to mywinning bid. I thought this was odd, because the seller'slocated in another state and I didn't think you had to chargesales tax on interstate sales. Is there something going on here Ishould know about?"

Generally, when you're selling stuff--online orotherwise--you charge sales tax only when the buyer is located inthe same state as you. Under current law, which may be changingsoon (see below), you're not supposed to charge sales tax onsales to buyers who live in other states.

There are two exceptions to this, however, and your sellerprobably fell into one of them:

First, if the seller has an office, warehouse, distributionfacility or retail location in your state, the seller may have tocharge you sales tax because he is legally "doingbusiness" in your state. This is why, when you buy somethingfrom a mail order catalogue, the invoice form sometimes says"residents of States A, B and C, please add sales tax to thetotal." The mail order company has its retail or warehouseoutlets in States A, B and C and is required to collect sales taxfrom buyers located in each of those states, regardless of theactual location your order is shipping from.

Second, a growing number of states are entering into"compacts," or agreements, encouraging in-state sellersto collect sales tax from buyers in neighboring states. New York and Connecticut have such an arrangement,while eight Midwestern states have banded together to create theMidwest Border Tax Compact. The idea is that bycharging your buyer state sales tax, you're helping the buyeravoid liability for "use taxes" on stuff they buy fromout-of-state vendors. (In just about every state, the sales tax anduse tax are the same rates and are calculated the same way.) Howthoughtful of them!

If you live in a state that has a reciprocal sales tax agreementwith another state, you're required to collect the otherstate's sales tax, pay it to your state's Department ofRevenue--with a special tax return form--and then hope and praythey remit the tax to the other state government (of course theywill, won't they?).

So why haven't you heard about this before? Up untilrecently, most states that have sales tax agreements with otherstates haven't been too aggressive about enforcing them. Why,you ask? Now, I'm not a politician, but I suspect it's hardto convince voters their tax dollars should be spent to helpanother state collect its tax revenue. There are also a few U.S.Supreme Court rulings that prohibit states from imposing salestaxes on interstate commerce, whether directly or indirectly, andno state official wants to be accused of violating federal law.But, as I mentioned above, the law may be changing soon.

Every few years, a bill is introduced in Congress, which wouldpermit states to levy taxes on sales made over the internet, amongother things. A majority of states have signed onto the StreamlinedSales Tax Project or SSTP, which is basically a national"reciprocal tax agreement," and are awaiting the"green light" by Congress to put the SSTP into effect.The bill, which was previously voted down, is being reintroduced inCongress this fall and stands a better-than-average chance ofgetting passed this time around.

If the SSTP passes Congress, then internet sellers of allkinds--including people putting stuff up for sale on eBay and otherInternet auction sites--will have to charge state and local salestaxes at the rates in effect wherever their buyers are located.With more than 7,500 sales tax jurisdictions in the United States,complying with the SSTP will impose a crippling paperwork burden onmany small e-businesses that can't afford to hire teams ofpeople or buy expensive software packages to help them comply.

A number of e-commerce companies and grassroots organizationsare lining up to fight the SSTP. For example, eBay's governmentrelations department has set up a special websitewhere you can sign up for e-mailings notifying you of thebill's progress. You can also sign up to receive "formletters" you can send by e-mail to your elected officials tolet them know the impact the SSTP will have on you.

Of course, your seller may simply have been mistaken in chargingyou sales tax. Call him and find out. Also, if the stuff you boughtfrom him is inventory you're planning to resell, youshouldn't be charged sales tax at all. So provide your sellerwith a "resale certificate" and he'll almostcertainly back off.