Thinking about selling your product online? Don't forget to collect sales tax from your buyers. Online businesses are just as liable as storefront retailers for collection of local and state sales taxes as long as they have “nexus” in that state. Both storefront and Internet retailers generally have a nexus in states other than their home states if they maintain a sufficient level of presence in those states.
Where do you have people and property placed permanently? If you own a warehouse or inventory in another state or have employees there, you may be subject to that state's sales tax. For example, an online retailer is considered to have nexus in Illinois if a customer can return an item to a retailer's physical location there.
Illinois' Attorney General has been aggressively pursuing online retailers for uncollected sales taxes. In 2004 she was able to negotiate a $2.4 million settlement with Wal-Mart, Target and Office Depot for uncollected sales taxes dating back to 1999. The Attorney General is still following up with other online retailers, expecting to strike settlements with some and going to trial with others.
In addition, the Illinois Department of Revenue (“IDOR”) is vigorously auditing Illinois businesses. In March 2005 alone, state investigators collected $200,000 in delinquent sales taxes from 15 companies in Cook County after threatening to revoke their business licenses. Illinois is focusing on compliance because sales taxes have been historically underreported. Not all underreported sales are intentional; many result from the fact that small business owners don't understand when they have to collect sales tax.
Unfortunately, many smaller business owners have discovered that they are liable for collection of sales tax during a state tax audit. For instance, a caterer learned through an audit that he has to charge sales tax on his service when he provides the food, whether it's an entire meal or just part of it, like hors d'oeuvres or dessert. However, he would not have to charge sales tax when the customer supplies his own food, and the caterer only provided waiters, bartenders and cleanup.
In Illinois, retailers must collect and pay a tax on all receipts from sales of tangible personal property to buyers for use or consumption unless the sales are exempt from tax by law. Common types of sales that are exempt from tax include:
Sales made to exempt organizations – not-for-profit organizations that have applied for, and received, an exemption identification number from the state.
Another type of business that is under examination by IDOR is the retailer that sells merchandise at fairs, festivals, flea markets or craft shows. Whether this is a full-time business or a hobby, the retailer is subject to sales tax. In many instances, agents from the Illinois Department of Revenue are present at these “special events,” where persons from other communities or states sell items to the public at fairs, festivals, flea markets or craft shows. The agents personally register each vendor and collect the proper taxes at the event. This ensures that IDOR has collected from out-of-state or transient merchants before the event has closed.
Overall, the collection of sales tax can be problematic given the peculiar complexities of sales tax laws, which differ not only from state to state, but also within the states themselves; some 11,000 separate taxing authorities exist across the country.
If you wish to learn more about how your business can most practically comply with its duty to collect sales taxes, please let us know, and we'll be happy to help.
Margareth M. Smid (B.A. Loyola University of Chicago; and J.D. and LL.M. from the Chicago-Kent College of Law) is an Associate Attorney with The Law Offices of Marc J. Lane, a Professional Corporation. Ms. Smid is also a Certified Public Accountant.
From all of us here at The Law Offices of Marc J. Lane, P.C., and its financial affiliates, our very best wishes for health and success in this New Year.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.