The mechanics of online sales tax

As the argument that online retailers should collect sales tax has been gaining steam, some people have begun wondering about the mechanics of online sales tax collection. Exactly how would it work? What would an online retailer—especially one smaller than Amazon and big-box retailers—need to do to collect sales tax for all 13,000 tax jurisdictions in the country?

The Streamlined Sales Tax initiative has provided the first part of the answer. It’s worked to reduce the costs and complexities of collecting sales tax for retailers and states alike, particularly for retailers that collect sales tax for multiple states. It does this by creating standard tax categories and definitions that every Streamlined member state must adopt—so that, for instance, a candy apple would be in the tax category “candy” in every member state, instead of being considered candy in one state and fruit in another. The actual tax rate isn’t affected—each state still decides on its own the applicable rate and whether items are taxable or exempt—but the standardization and simplification Streamlined provides means that retailers have a much easier time collecting sales tax for multiple states.

But the simplification that Streamlined provides is only part of the answer. The other part of the answer is technology, which is essential to keep track of the 13,000+ tax codes in the country. Technology providers have stepped in with software and services that provide various levels of sales tax management.

Recognizing the key role technology (and, therefore, technology providers) plays in collecting sales tax online, the Streamlined Sales Tax Governing Board established a certification process whereby technology providers have their systems tested and verified by each of the Streamlined member states. Upon successful completion of this process, these companies earn the title of “Certified Service Provider” (CSP) and are authorized to perform all of the sales tax functions for companies. Due to the logistical complexity of the certification process (it takes about a year of coordinated efforts among all member states to certify a CSP), companies may apply to become CSPs only during a brief application period every other year.

FedTax was designated a CSP on July 1, 2010. We are currently the only CSP that is providing its services at absolutely no cost to merchants.

As a Certified Service Provider, we handle every aspect of sales tax calculation, collection, and remittance for our clients. Our TaxCloud service calculates, in real time, the sales tax due on any transaction. It determines whether an item is tax-exempt, manages entity exemption certificates, and automatically integrates changes and updates to tax codes, rates, and jurisdictions—for every jurisdiction in the nation. Finally, TaxCloud keeps track of all collected sales taxes to be remitted by retailers , generates and files all state-by-state sales tax returns, and remits tax payments to all applicable jurisdictions.

What’s more, TaxCloud is extremely easy for anyone to use. Most retailers are able to set up TaxCloud in less than 20 minutes, and it can be integrated into virtually any accounting or e-commerce shopping cart system.

Because we are a CSP, we take full responsibility for any state audit requests on behalf of our TaxCloud clients. In addition, as a CSP we are compensated by SSUTA-participating states, so we can provide TaxCloud to retailers for free. In short, we’re offering a service that handles all sales tax management obligations for retailers at absolutely no cost.

If you’d like to learn more about TaxCloud, check it out here.

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