Sales tax for U.S. subscription and paid content sites can be a nightmare.  Our handy guide includes an info table by U.S. state, vendor recommendations, a case study on relevant New York sales taxes, and a must-read overview of how to figure out where you have a “business nexus” and how taxes can vary by city (not just state!) 

In 1992, the US Supreme Court ruled that online retailers (including subscription, membership and other paid content sites) are exempt from collecting sales taxes in states where they have no physical nexus.  Unfortunately, that doesn’t mean you’re off the hook because the ruling allowed Congress, individual states and even local towns to impose their own sales taxes on your activities by redefining a “business nexus.”  Since then, many states have done so and more are expected to do so this year.

The danger of not collecting state and locally-mandated sales taxes is that you could be hit with an unexpected bill.  For example, The March of Dimes had $26,000 of its donations taken away by the state of Nebraska after the organization bought 4,000 T-shirts from a Florida vendor — despite the fact that they’re a “tax-exempt” nonprofit organization.

Here are four steps Subscription Site Insider strongly advises our members to take to avoid this problem.  (Note: We are not lawyers or CPAs. Although we consulted Sales Tax Expert David Seiden of Citrin Cooperman for this story, the vast diversity in sales tax laws by state and municipality makes it impossible to give advice for your specific company.  Please contact your own CPA and state and local officials to check your compliance requirements.)

#1. Determine Your Company’s Business Nexuses
Your company’s “business nexus” was originally defined to be any state you had a physical presence in, whether an office, warehouse or retail location (i.e., brick-and-mortar store), and you were obliged to collect sales tax within your business nexus.

In recent times, many states have amended their business nexus definitions to include any business activity within a state, including remote sales and telemarketing staff, and affiliate marketers with sites based in the state. The rule also applies to any state in which you are storing products, even if they’re storied in a warehouse you don’t own.

Basically, if anyone or any company is generating revenue or collecting/soliciting orders for you, you must collect sales tax in the state in which they operate. This does not apply to paid employees that do not generate revenue directly, such as writers and graphic designers.

You may want to consider altering your business nexus, as Amazon and Overstock did. After the state of California redefined a business nexus to include affiliate marketers, both companies pulled their affiliate advertising from sites located in the state. You should also keep your business nexus in mind when hiring sales and telemarketing staff or considering any revenue-generating deals.

Since the definition of “business nexus” varies state to state (and many states are amending the definition), you will have to know the definition for each state you sell in. Take a look at Maryland’s definition and New York’s to see how your business nexus might vary in each state.

#2. Figure Out How Your Products, Services & Content Is Classified for Tax Purposes
What goods and services get taxed also varies from state to state and within a state depending on local laws (i.e., some states tax physical CDs bought online, but not digital downloads of the same content).

You will have to consult with your CPA to determine what content/services/memberships get taxed in each of the states in your business nexus, as well as the variation within a state based on local sales tax laws. This will probably be a lengthy conversation because most CPAs are trained to handle bricks-and-mortar tax issues, and the online rules are changing constantly.

In general, most states exempt periodicals that publish four times a year in print or online text as long as they are on a variety of topics by a variety of authors, but pure “information” services are subject to sales tax. See the Case Study Example below to help you understand the subtlety in these rules via a real-life scenario — it’s useful to review even if you don’t have a nexus in New York.

Also, please note that sales tax is usually determined by the shipping address of a customer, not the billing address. For gift subscriptions, we suspect the laws default to the purchasing customer’s billing address, but check with your CPA to be sure.

#3. Research Tax Rates for Your Offerings
If you have a limited number of locations in your business nexus (including no affiliates), then you may want to research the tax rates on your own. Ask your CPA to contact the state and local governments where you might have a nexus to determine:

• what they consider a nexus;
• how they classify products and services that you offer;
• what the current tax rates are; and
• what, if any, paper work or other compliance administration do you need.

See the table below with links to each state’s Department of Revenue for a handy starting point

If your business nexus includes many locations, you may want to just jump to step #4.

#4. Consider Sales Tax Software:
If you have a business nexus with many locations or if you sell diverse content/services, step #3 may seem like a formidable task. You may best be served by using sales tax software, which can be plugged into your ecommerce systems to keep you in compliance with changing state and local sales tax laws.  Some of the most commonly used solutions include:

• Vertex (used by Netflix and Electronic Arts)
  www.vertexinc.com
• Avatax by Avalara
  www.avalara.com/products/avatax
• ADP’s sales tax solutions
  http://www.adp.com/solutions/employer-services/sales-and-use-tax.aspx

David Seiden of Citrin Cooperman took the time to explain how the sales tax laws would be applied for various types of online content in New York State. For simplicity’s sake, this case study assumes that the company/website is based in New York and selling to someone in New York.

• Paywalled content — Written content can be exempt if it meets certain requirements in New York. For example, it is written by a variety of authors on a variety of topics (i.e., not just one long book in serial form). This also includes industry news that comes in the form of newsletters or journals.
• Informational content — Information that can be sent out to more than one person would likely be considered an informational service and be subject to New York State sales tax. This includes items like real estate listings that subscribers would pay to access.
• Online dating — New York State considers online dating to be an “information” service (the company collects the name, email addresses, and data on potential dates and makes it available to subscribers). Therefore, online dating subscriptions would be subject to sales tax.
• Consulting/Coaching services — Providing one-on-one consulting or coaching services via email, phone or Web should not be subject to sales tax in New York. However, larger group consulting services might be considered an information service (see above) depending on the type of information provided.
• Audio/visual downloads — In New York, audio/visual downloads are not subject to sales tax unless the customer receives tangible, personal property, such as a CD or DVD.
• Events — Whether an event is taxed usually depends on whether a state subjects “admission fees” to sales tax and whether states provide exemptions to this general rule. New York taxes admission fees, but has exemptions for educational events, including professional education seminars. Seiden says he is not aware of any Webinar that is subject to sales tax in New York.
• Advertising space — Banner and display ads on websites are not taxed in New York.

As you can see, these answers are very specific. If you run a membership site that’s not an online dating site, you may not have to collect sales tax, but it depends, as always, on the specifics of your product/content/service. The devil really is in the details, so speak to a tax expert or the company CPA to make sure you’re in compliance.

This table lists the general sales tax rate for each U.S. state (as well as Guam and Puerto Rico) as well as the highest possible sales tax rate once you add the highest local sales tax rate within the state. You can also click on each state’s name to be taken to that state’s Department of Revenue (or similar state department).

Sources: Wikipedia and the IRS (as of 2/7/2012)

If you’d like to delve deeper into sales tax issues, here are some of our favorite resources:

Amazon’s sales tax rules, illustrating how sales tax varies by both product and location of the buyer.

A well-balanced article on the pros and cons of collecting sales tax from online sales.

The Streamlined Sales Tax Governing Board, Inc., which is looking to simplify online sales tax code.

Hope for simplicity in the online sales tax code through federal legislation.