The Internet Tax Man Cometh

Q: I was contacted by the city tax collector to say that my business is scheduled to be audited to see if I owe sales tax on items purchased on the Internet. Can they really make me pay sales tax on internet purchase? I thought you could buy things online tax free? -- Charlie B.

A: Sorry, but your local municipality is well within its rights to audit your business to identify items purchased online. The city can also demand payment of sales tax on those items if sales tax was not previously paid. Don't be surprised if the auditor asks for access to your books and to see purchase receipts and invoices for at least the past year.

One of my companies recently underwent such an audit and it really was not as painful as you might think. Being a software company, the majority of our online purchases were for computer equipment, technical manuals, and software development tools. Since we purchase computers from a large supplier who collects sales tax at the point of sale (ditto for the development tools), the only sales tax we ended up owing was for an inordinate number of technical manuals and books purchased at Amazon.com.

If your small business is like most, the majority of your large purchases are made locally from companies that already collect sales tax. Furniture and computer equipment are typically the largest ticket items a small business buys, so unless you bought your desks and computers off of Ebay (which is highly possible these days) you should be OK.

Internet sales taxation has been a topic of contention even before Amazon sold its first book and Priceline booked its first flight. One of the more controversial points is that no one, including our own government, seems to have a clue how to implement a fair and logical Internet taxation process. With over 7,500 different local, county and state taxation systems in the United States, you can understand the controversy.

In 1998, Congress did what it usually does when faced with a potentially explosive issue like Internet tax collection -- it decided to put off making a decision. Congress enacted a three-year moratorium on the collection of taxes to give an appointed advisory board time to come up with an acceptable solution. That moratorium ended in 2002 and opened the door for municipalities to begin collecting sales tax on their own.

Here in Alabama the state sales tax collection department has aired radio spots asking Alabamians to step up to - and toss dollars into - the proverbial collection plate. The commercial kindly suggests that if I have purchased anything from an online retailer, I am honor-bound to proclaim such purchases and submit the appropriate sales tax to the collection department right away. They thank me in advance for my cooperation.

So, Charlie, when the auditor shows up at your door the best thing you can do is smile politely and be totally forthcoming. The sales tax that you pay is a small price for the convenience of shopping online.

Or at least that's what you should tell yourself as you write the auditor a check.

Small Business Q&A is written by veteran entrepreneur and syndicated columnist, Tim Knox. Tim's latest books include "Small Business Success Secrets" and "The 30 Day Blueprint For Success!" Related Links: http://www.smallbusinessqa.com http://www.dropshipwholesale.net

In The News:

A Tax Trap Many Fund Investors Fall Into  The Wall Street Journal

Save Money on Taxes - Let Uncle Sam Pay for Your Fun!

"Deducting Meals and Entertainment"O.K. You've been working really hard on... Read More

Tax Deduction for Alimony Payments? - Yes!

Over 50% of marriages end in divorce in the United... Read More

Tax Jokes and Quotes

Do you realize that some tax forms ask you to... Read More

Home Business Tax Tips

If you have recently started an Internet or home business,... Read More

Slash Tax when Buying a Business

When buying a business, how the "purchase price" is made... Read More

The Tax Man Cometh... To Search

You're at your office, or home, and the doorbell rings... Read More

Tax Trap #3 -- IRS Penalties, Interest and Love Letters

As a small business owner or self-employed person, one of... Read More

Home Based Business Tax Deductions

Running a home based business reaps many wonderful tax deductions... Read More

Paying Workers ? What Can You Write-Off?

As your business grows, you are going to need help.... Read More

The Seven Deadly Tax Sins: Commonly Missed Deductions

It's that time again, the April 15 tax deadline is... Read More

Uncle Sam is Ready...Are You? Organizing Tips for Tax Time

Anyone who is closely related to an accountant knows that... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part II)

All tax authorities to e-commerce transactions should investigate the record... Read More

IRS Lock-In Letters ? What?s An Employer To Do?

Employers often ask employees to designate the amount of tax... Read More

Understanding Marketing Tax Deductions

Marketing is a necessary expense in running practically any business... Read More

10 Tax Tips to Reduce Costs and Increase Income

No one likes paying tax. Everyone understands that tax is... Read More

Tax Reform, My Way

We need real tax reform and we need it now.... Read More

Render Unto Caesar

Once a year Canadian taxpayers are required, by law, to... Read More

Euro Tax Haven Threat

Media reporting of a new EU savings tax directive has... Read More

Tax Tips to Save Money on Taxes - Get the Corporate Kick and Save Loads of Money

Why a Corporation Helps Save You TaxesThe Tax Rates (Notice... Read More

Getting A Second Extension to File 2004 Taxes

Millions of people file tax return extensions every year. The... Read More

Surprising Truths About Tax Preparers

Choosing the right tax preparer for your business is a... Read More

Income Tax Returns Your Accountant Should Not File

You've been feeling uneasy (perhaps even guilty) because you've failed... Read More

Some Folks Pay A Lot Less Tax Than Others On Very Same Income?Did You Pay Too Much Tax In 2004?

Someone once remarked, "Next to being shot at and missed,... Read More

The Implications of Income Tax Charge on Estate Planning

OverviewIn the Pre-Budget Report of December 2003 the Chancellor Gordon... Read More

How To Set Up A Tax-Saving Bookkeeping System

One of the most important, but least understood or appreciated... Read More