Taxing eBusiness

    June 18, 2003

Keep it simple! You’re going to get tired of hearing us say that but, we can’t stress the point too much. Your Internet store is not for you; It’s for your customer.

The latest word on Internet tax is that the moratorium will continue until some politician wakes up in a foul mood and decides that your government isn’t charging enough for services. Actually there is a lot of confusion as to what taxes we’re talking about. There are two possibilities: An Internet access excise tax and a state sales tax.

The access tax would be like the Federal excise tax paid on your phone service. This was the initial impetus to the tax moratorium for the Internet. Somehow this idea carried over to questions as to whether sales taxes should be imposed on Internet sales.

You don’t have to worry about the excise tax. That’ll be added to the bill from your Internet Service Provider and maybe even your hosting company. Our guess is that it’s not going to break anyone. It’s just another brick on the pile.

Of more concern is whether to apply sales and/or VAT tax to sales made over the Internet and shipped to locations within your regional tax jurisdiction. Shipments outside of a jurisdiction have traditionally been excluded from applicable “state” taxes. A jurisdiction most often encompasses a state or Euro group but, can also include municipalities. Your specific jurisdiction is generally determined by the location where a sale is consummated. IE: Where you get the money. It can, however, include, as it is with large retailers, anywhere where you’re licensed to do business.

And that’s just the tip of the tax quagmire iceberg. Certain items may carry different tax rates which can apply differently across any of the various jurisdictions. Add to all of this the European community where-in certain countries are contemplating some pretty stiff taxes on goods that can be delivered over the Internet. Including not just software but, items like music and videos. These tax rates will be determined by both the point of origin of the goods and the ultimate destination. In that respect the taxes resemble import taxes but they’ll be applied to any downloaded product and could be in the range of 15% to 25%. OK, so where’s the point of origin? Would it be the host server, the distributor location, the location of the company that develops the product, the artist’s home? Who knows???

Why do we raise these issues? Because, the degree to which you concerned you are about item taxes will determine what kind storefront software you will need. Computing accurate zone sensitive sales taxes can be a daunting task for the storefront software provider. This means, if you want it done, expect to pay, sometimes dearly, for the service.

Our admonition: Keep it simple. Yes, we provide MyStore3 storefronts that let you specify overall tax rates and item tax rates and will compute zone sensitive charges based on your state or VAT tax jurisdiction. However, our feeling is that for most small and home businesses, this isn’t necessary.

To that end we provide webPeddle and PeddleGold storefronts that don’t compute any taxes. Here’s our logic, assuming you should be paying a “state” tax in the first place.

This is the Internet, you’re a small business; most sales will ship outside of your tax jurisdiction. OK, you’re in a large state so let’s say 5% of your sales are in-state and the tax rate on most items is 6%. This means that three tenths of one percent of your overall sales volume is subject to a tax payment. That’s a tax liability of $3.00 on every $1000.00 in sales. It’s not worth the complication, aggravation, and cost of sophisticated storefront software to collect this from your customer. Just keep good records and pay the taxes out of pocket when due. Your state doesn’t care if you collect the tax, just that you pay it.

Mel Davey is the creator of ImagineNation (, a full service E-Commerce Application Service Provider, offering Storefronts, Order Management Utilities, and 3rd party credit card processing.