There was plenty of rhetoric on May 10 when the U.S. House of Representatives voted 352-75 to extend a ban on new Internet taxes until 2006. But lost amid all the shouting was one small point: The bill doesn't cover sales taxes.
Laws on the books across the country require online merchants to tax purchases when the buyer lives in a state where the retailer has a physical presence, or "nexus"; that presence could be anything from a retail outlet to a warehouse. And all sorts of Net retailers are doing just that right now.
Much of the time it's a straightforward process. Major e-commerce suites like Microsoft's Commerce Server 2000 have basic tax capabilities built in. You plug the applicable state or municipal tax rates into Commerce Server. Then, whenever a local buyer makes a purchase, the software automatically factors the tax into the price.
The problem is tougher for big companies, which may have physical presences all over the country. There are roughly 7,500 different tax jurisdictions - states, counties, cities - in the United States. And different products may be taxed differently within those jurisdictions: Software might be taxable; sneakers not. In Arkansas, for instance, beer is taxed at 23 cents per gallon while table wine commands three times that. And the tax rates can change, rising and falling at the whim of local voters. Keeping an e-commerce suite up to date with all these variables can quickly become a nightmare.
"You'll probably always be charging somebody the wrong tax" if you try to do it yourself, contends Bill Miller, tax manager for Hubbell Power Systems, a Centralia, Mo.-based manufacturer of electricity-transmission products that sells to utilities all over the country and has a nexus in 30 states.
The company once relied on in-house software to handle sales taxes. But keeping it current proved burdensome, so the company switched to products from tax-software developer Taxware, which are also used by General Motors, Home Depot and Wal-Mart. The software comes loaded with the tax codes for every taxable product a business stocks and the corresponding rate for each jurisdiction. To keep up with changing tax laws, Hubbell uploads updates from Taxware each month.
If you don't want to buy tax-processing software, you can hand it off to a company like CyberSource. Either way, the cost of compliance starts at around $5,000. That can quickly climb into hundreds of thousands of dollars depending on the size of the business and the number of transactions.
But just collecting taxes isn't enough; retailers must remit them to the proper authorities. Typically, a merchant pours transaction records from its tax calculation program into special remittance software (such as Taxware's Remit or Vertex's Quantum Returns), which then automatically fills out the appropriate state forms. The retailer simply sends in the forms along with whatever money is owed.
The toughest part of the tax problem may be figuring out whether you have a nexus. Is a server in a colocation facility a nexus? How about a local salesperson? The law varies by state. For specific answers, retailers need a tax attorney or consultant. In e-commerce, some things still require a human touch.
