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Does the Internet Tax Freedom Act Exempt Online Sellers from Paying Income or Sales Tax?

Does the Internet Tax Freedom Act Exempt Online Sellers from Paying Income or Sales Tax?

With tax season already upon us, online sellers and ecommerce site owners need to understand the impact of the Internet Tax Freedom Act. Specifically, does the Internet Tax Freedom Act exempt online sellers from paying income tax?

What is the Internet Tax Freedom Act?

The Internet Tax Freedom Act (ITFA) was enacted on October 1, 1998 with passage of the bill by the U.S. congress in 1997. The Act prevents the government from assessing a tax on internet access (which would then be passed forward to users by companies that provide internet access, such as cable companies, wireless broadband providers and so on).

The idea behind the bill is that if information is available to the public on the internet, its access shouldn’t be taxed. The Act has since been extended several times (2001, 2004 and 2007) with only minor adjustments, including making this ban on internet taxes permanent and on-going with the Permanent Internet Tax Freedom Act of 2007. Most recently, in 2015, the Act was amended in the form of the Internet Tax Freedom Forever Act which “Amends the Internet Tax Freedom Act to make permanent the ban on state and local taxation of Internet access and on multiple or discriminatory taxes on electronic commerce.”

The Internet Tax Freedom Act Does Not Exempt Online Sellers from Paying Income Tax

The Act covers internet access fees only; therefore, online sellers are not exempt from paying income tax or applicable sales tax for goods sold via ecommerce. In other words, there is no tax assessed that affects the public’s access to view an ecommerce site, but that does not exempt transactions that occur online from applicable sales or income taxes.

50-State Guide to Internet Sales Tax Laws

Nolo.com is a legal site that provides information and resources to consumers and businesses, offering answers to everyday legal and business questions. One of the resources on their site is a directory which has links to where you can find information about taxes that apply to internet sales in all 50 states. When you click through to your state, the site will provide you with extensive detail and additional links back to laws and statutes that apply to ecommerce transactions for individuals and businesses in your state.

Determining Which States’ Sales Tax Applies to Online Selling

Online sellers may sell not only across state lines but even across international borders, but sales taxes are not collected based on buyers’ locations. As a seller, determining which states you may be obligated to collect and pay sales taxes comes down to a term known as “nexus.” Nexus has been defined by the government to mean any state where your business has “a significant presence” and which may be indicated by:

  • Having an office
  • Having employees
  • Having a warehouse, storage
  • Having distribution facilities or capabilities (such as a third party drop-shipper)
  • Having affiliates
  • Having a temporary business location; e.g., pop-up stores, mobile stores, appearing at trade shows, craft fairs, etc.

Income Tax for Ecommerce Business Owners and Online Sellers

As indicated above, the Internet Tax Freedom Act in no way exempts online sellers from income tax or business income tax obligations at the federal or (if applicable) state levels. While you should always consult a tax professional, you can also get more information about what constitutes taxable income for a business at sba.gov, the U.S. government’s resource and information site for small business owners. This page also includes links that will take you to applicable laws and regulations for all 50 states and U.S. territories.

IRS Guidelines for Online Sellers

Online sellers, including online auction sellers that conduct business on platforms like eBay and similar sites, may have tax responsibilities. The IRS has published several helpful IRS guidelines for online sellers on their site, noting specifically that “Misinformation about laws such as prohibiting the taxation of Internet access (Internet Tax Freedom Act) and limiting sales tax on interstate sales have led some to incorrectly believe that Internet sales income including online auctions is not subject to income tax.” The article goes on to explain more about applicable income tax, self-employment tax, employment tax, excise tax, capital gains taxes and business income tax – any of which could apply for online sellers.

U.S. tax laws are complex, and even more so when state income and sales tax laws must also be taken into consideration. The more you know and understand about taxes that apply to online and offline sellers, the better you will be able to manage and grow your business.

Is there a business regulation or tax law that caught you by surprise? Share it with other business owners in the comments below or tweet it to us at @KabbageInc to help other business owners.

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Kabbage Team

The Kabbage Team is here to not only fund the small business loans you need, but to help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.

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