How Do I Determine What Tax I Owe for Sales Over the Internet?

Well this gets very complicated with an internet business depending on what you're selling and where you're selling it to and your level of contacts with that particular state, whether they're physical contacts which a lot of internet businesses don't have or more commonly economic contacts. Economic contacts can be defined by a dollar threshold. Let's say you make a hundred thousand dollars in sales in a state. Or they can be designed by a transaction threshold, so let's say you do 200 transactions in a particular state. So it gets really complicated to determine the amount of tax that you owe because each state kind of has similar rules but they're different in a lot of ways. So the first thing that you do is you figure out based on your sales summary what states you are doing business with the most and that determines the nexus rules in those jurisdictions so that you can make sure that you're appropriately collecting tax or if you're not collecting tax, that you're not at risk or have any liability associated with that. If your business is expanding, you want to know where the threshold is, when you've got to turn the switch on so that you start collecting tax in that jurisdiction and then with the other states, it's about planning. So it's about looking at your level of contact, looking at your sales and determining whether or not you need to collect tax in that jurisdiction but the way that you do this is you start with your top ten, your top 15 states that you're doing business in which may represent 65 to 80 percent of your sales and then you look at other subjects where you may have less activity. That's the best advice I can give to internet businesses or businesses that do a lot of business over the internet in order to account for their sales. Now the good news is there's a number of software programs, there's a number of tools, we'll help you execute this part of the process but it's not just the execution that's important because software will only do the execution part, it won't do the planning part. Software doesn't think independently, software relies on the inputs it receives to spit out outputs. What you need before you get to the execution part, so you need a good strategy. Going in you need to understand where you're exposed, what the risk is, what your filing requirements are, what your paying requirements are and then build a plan around that and use software to automate and execute. This doesn't have to be a long drawn-out process, this doesn't have to be an insanely costly process, you don't have to start filing sales tax returns in all 50 states but you do want to plan going in and then you want to make sure you can execute that plan effectively so that you're not at risk in the future.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law