I recently attended a class on sales and use tax and thought it might be a good time to discuss this complicated issue. I’d like to make you aware of a few things that you may not know about sales tax.
If you own a store in Fort Collins, Colorado and you sell an item you will need to collect sales tax for the City of Fort Collins, Larimer County and the State of Colorado. If you ship it outside Fort Collins and outside of Larimer County, you need to collect sales tax for the State and the purchaser needs to file a use tax return for his city and county. Every business owner selling items is aware of this rule so no big deal here. But perhaps every business owner does not inform his customers when sales tax is not collected that use tax is due and the customer should file a use tax return with his city & state.
If you ship outside of Colorado you do not need to collect sales tax unless your business has “nexus” with that state. The customer however, needs to file a use tax return for the purchase. And here lies the rub with internet sales. How many of you are filing a use tax return with Colorado for your internet purchases? You should be tracking your online purchases so that at the end of the year you can file the use tax return and pay the use tax. Use tax is similar to sales tax and comes into play when you didn’t buy an item in your city & state and pay sales tax. If you bought your item in another city and state, Colorado will give you a credit for the amount you paid. If you paid more it’s all well and good, you don’t get a refund but you don’t owe any more. If you paid less, you’ll have to pay Colorado for the difference. This applies at both the individual level and the business level. The State of Colorado will audit businesses so you need to be aware that you need to file this return and pay this tax. Colorado is paying particular attention to doctor’s offices for medical supplies ordered online and businesses with office supply expenses.
Earlier I mentioned “nexus”, the easiest example of nexus is when your company’s main office is in Colorado but you have a smaller office in another state. You have “nexus” with that state and will need to collect sales tax for that state. You can also have nexus with a state when you have an employee in that state, no office just an employee. You will also have nexus with a state if you voluntarily file for a sales tax license. There are all kinds of variables and you need to check with each of the 50 states to see if you have nexus with them. Once you determine nexus at the state level don’t forget the county and city levels. Each of those within a state can be different. That is why it is so hard to come up with a sales tax for internet sales. Take our fine state of Colorado, we have 15 cities that have sales tax on the sale of a home but Colorado does not have sales tax on the sale of a home! South Dakota has sales tax on tax preparation fees which normally aren’t taxed because it is a service and not a tangible good. Sales tax is a complicated animal that leaves anyone trying to understand it befuddled. The key is to realize you might have an issue when purchasing things online and not just assume that because no sales tax is collected no tax is due.