Taxation Around the Nation

October 21, 2005 7:39 AM

Does a company like 37Signals / Basecamp have to charge its users for sales tax? Looking at Basecamp, they charge different monthly rates for associated tiers of service. I would imagine they have customers from all over the States, as well as different countries. Are they required to apply sales tax to these monthly rates based on the customers geographic location. Or, because they are an e-commerce entity, and aren't really selling anything tangible, do they simply charge the flat rate and ignore sales tax?

More pointedly, I am wondering how complex tax collection / reporting is for a U.S. based e-commerce business of this sort.
posted by jasondigitized to computers & internet (6 comments total)

The sales tax is paid by the customer but collected for the government by the vendor. For the state to impose that collection burden on an out-of-state vendor, the vendor must have nexus with that state. Nexus is essentially a connection to the state (e.g., an office or employees in the state) giving the state jurisdiction to impose the collection obligation. Basically, this means that if you have all of your operations in one state, you have no obligation to collect sales taxes for any other state other than your home state, even if you have customers in the 49 other states. The customers in the other 49 states are obligated to pay that tax (now called a use tax) to the state in which they reside.

Whether the specific services you reference are subject to sales taxes is a totally separate state-by-state question.

Once you have nexus in all 50 states (or voluntarily agree to collect the tax), there is software that will automatically track the state and local sales taxes.
posted by probablysteve at 8:39 AM on October 21, 2005

Tax and revenue recognition for software companies that don't actually ever put a CD in a box and ship it are varied and complex. As far as I understand, though, these types hosted products are sold as a "service" rather than a product and as such are not subject to sales tax. You're going to want to check with a CPA/tax advisor though as state tax collection agencies can make the mob look friendly if you cross them.
posted by Wolfie at 8:45 AM on October 21, 2005

Wolfie, there are states with sales tax on services.
posted by phearlez at 10:40 AM on October 21, 2005

The Canadian GST, the Goods and Services Tax, applies to services sold, even to non-residents.
posted by GuyZero at 11:30 AM on October 21, 2005

My bad - as i said - varied and complex - talk to an expert.
posted by Wolfie at 11:43 AM on October 21, 2005

Note that the tax picture is changing with several states entering into a compact, the Streamlined Sales and Use Tax Project, which became active this month. Essentially it simplifies the process of determining and applying the sales tax for individual purchases.

As of now there is no federal law mandating collection, so taxes on out-of-state purchases are basically up to the customer.
posted by dhartung at 12:53 AM on October 22, 2005