The tax man is coming to your Internet store. Sooner than you think.

Today, 13 January 2009, New York State Supreme Court Justice Eileen Bransten dismissed a lawsuit brought by challenging New York State’s right to collect sales tax from out-of-state Internet retailers.

With most states cash-strapped and facing decreased revenues from existing sources, collecting sales tax on goods sold via the Internet and delivered in-state is looking like a ripe plum.

Much hinges on interpretation of conditions included in a 1992 US Supreme Court ruling, on what constitutes a “substantial physical presence” in the state.

While this issue may not be resolved one way or the other in the immediate future, NOW is the time to look into your Internet store’s system functionality. Implementing software changes to your system to comply with sales tax collection will be a problem; more likely a nightmare.

Most local, physical retail stores only have to collect taxes for one state, and possibly a county or municipality. An Internet store will need to incorporate and apply tax rates for all 50 states, Washington, D.C., and U.S. dependencies and territories. (Don’t kid yourself. Once the Internet sales tax moratorium dam breaks, every taxing entity which can will be riding the flood waters.)

In many states sales taxes are not collected in a blanket application. Sometimes groceries are exempt, but prepared foods, such as restaurants are taxed. Sometimes prescription medicines are exempt. In other cases, certain classes of goods are considered luxury items and taxed that way. Therefore, your store will need to be programmed to compute and collect taxes based on these variables as well. (Your customers will demand it. They won’t want to pay sales tax to you if their local store doesn’t have to charge it.)

And that’s not all. Not only will your site’s store be responsible for charging and collecting the sales taxes, but your bookkeeping and financial departments will need to adjust all their systems in order to track, and subsequently pay all that collected tax to all those states and agencies.

If your company has been doing Internet sales to the United Kingdom you have some small idea how badly this will shake up operations. This past year the U.K. changed their Value Added Tax, V.A.T., from 17.5% to 15%, on short notice. Many businesses are still struggling to bring their sales and accounting systems into compliance.

Of course, there is a small bright side to this. Here’s an opportunity for some entrepreneurs to set themselves up as tax rate by ZIP code databases, or info clearinghouses, or systems upgrade specialists, etc.

We are living in a new economic landscape. The old assumptions no longer apply. Internet sales taxes are coming. Start planning and implementing your system upgrade changes NOW.

Steve Lange
Senior Editor
Palo Alto Software