Online Sales Tax: To Charge or Not to

Online Sales Tax: To Charge or Not to Charge?

As a virtual corporation, sales tax is a sticky issue for you. Because the rules for online sales tax are still changing, it is difficult to determine whether you should charge a sales tax for your product or service. Some virtual corporations don't charge sales tax on anything, which is legal at the moment but is very susceptible to change. To be on the safe side, most online businesses charge sales tax only to customers and clients who reside in the state-or states-in which they do business.

You may be thinking that since you are a virtual corporation and your products are available worldwide via the internet, you are "doing business" in every state. However, according to the federal and state governments, you are only considered to do business in a state if your company has an office, warehouse, distribution facility or retail location in that state. If you work from home, you are only doing business in the state you live. Therefore, you would charge sales tax only to residents of your state.

There are a few exceptions to this rule as well. Certain states are forming partnerships to force virtual companies to collect sales tax from residents of the partner state. Currently there is such an arrangement between New York and Connecticut, as well as eight Midwestern states who have formed the Midwest Border Tax Compact to enforce sales tax collection in multiple states. So, if you are doing business in New York, you must charge a sales tax to both residents of New York and residents of Connecticut for your product or service; and vice versa.

Check with your state government and the IRS for specific rules regarding sales tax in your state. It is important to stay current with sales tax laws.

NOTE: Remember when it was mentioned that you must file sales tax reports, even if you haven't sold anything yet? State governments are suspicious of businesses who do not file quarterly sales tax forms. As a business, you are required to file this form every quarter, by the deadlines of March 20, June 20, September 20, and December 20. If you're just starting out and haven't set up for sales yet, you can fill in 0's on this short, easy-to-understand form and either mail it to your state tax office or file electronically from their web site.

Uncle Sam Wants You! Tax Tips for the One-Person Show

If you have never owned a business before, you may not be paying yearly income tax. Many taxpayers receive income tax refunds each year, especially if they have children (or, as the IRS so fondly deems them, "dependents."). However, most business owners must pay income taxes each year, because unlike a traditional employment scenario, taxes are not automatically deducted from your paycheck when you work for yourself.

Though income tax filing generally occurs once a year, some time between January and April, the federal government will allow you to make quarterly payments against your anticipated income tax. Isn't that generous of them? Actually, it is a good idea to set up quarterly payments for your business, because you avoid having to come up with a large chunk of cash at the end of tax season. If you can afford to pay ahead, you can estimate the profits your business should see during the tax year and overpay-and still enjoy a refund in April.