PUBLISHED JUNE 2002
by Steve Carlson, President, Upper Access, Inc. —
Although publishers collect sales taxes on only a small minority of sales, we have to know our state laws and regulations. Most of us register as tax collectors, file quarterly reports, and face penalties if we make a mistake.
The rules are different in every state, as I’ve learned in adapting business software for publishers throughout the U.S. However, it’s not difficult to figure out the specific requirements in your state if you understand the general patterns.
Which Publishers Need to Register
Unless you operate your business from one of the four states with no sales tax (Delaware, Montana, New Hampshire, and Oregon), you must register with your state tax department. If counties or municipalities in your state also have sales taxes, you will probably be required to collect those as well. You do not have to collect taxes for any other state unless you have a substantial physical presence there.
To register, telephone your state tax department to request the forms, or check the department’s Web site for downloadable forms.
Many U.S. publishers also register to collect the Goods and Services Tax (GST) from their Canadian customers, regardless of whether they are legally required to do so (see below).
Which Sales Are Taxed
In most states, your only taxable customers are individual book readers who buy directly from you. Sales to bookstores and other resellers are generally nontaxable. You may need to get a tax form filled out by each of these tax-exempt customers in your state, however, and keep those forms on file. Usually they have to be filed just once, with the customer’s first order. The state tax department provides the forms to every business registered to collect the sales tax. (Usually one form is provided, with instructions to photocopy as often as needed.)
Your own business will qualify for tax exemption when it makes wholesale purchases of items it will resell. For example, if you have a book printed within your state, you will provide a tax form to the printer to avoid paying a sales tax.
That is the traditional U.S. sales-tax system. However, several states have been considering a gross receipts tax–which taxes all business activity, not just sales to the end consumer. In other words, wholesale sales would also be taxed. At least one state, Hawaii, has adopted this system, and Canada’s GST is a gross receipts tax.
State tax departments also make the rules for collecting municipal or county taxes on mail-order sales. Some states require you to collect taxes for each county at its own rates, while others simplify the procedure with a uniform statewide rate. This information should be provided at the time you register, but if you are unsure, call or e-mail your state tax department for clarification.
When “bill-to” and “ship-to” addresses are different, the “ship-to” address usually determines whether the sale is taxable. For example, if an out-of-state customer orders a book to be mailed to somebody in your state, it’s probably taxable. However, legal language on this differs from state to state, so check with your state tax department or accountant to be sure.
What Is Taxed?
Many states tax only goods, not services. If your state is one of them, you need to collect taxes on book sales but not on sales of services (such as consulting or graphic design) if you offer them. Also, your shipping charges would not be taxed.
However, some states do tax services, including shipping. A few states make the question a little more complicated. For example, California does not tax shipping if you are simply passing along the actual charges you pay to UPS or the Post Office, but does tax any additional “handling” charge.
The Canadian GST
U.S. publishers with Canadian sales exceeding $30,000 yearly are required to register to collect Canada’s 7% Goods and Services Tax. Some independent publishers with lower Canadian sales register voluntarily. Why would they do that? The arguments in favor of registering are:
- If you don’t collect the GST from your customer, the Canadian Postal Service will, with a $5 surcharge.
- Packages stamped with your GST number are likely to be delivered faster.
- Unlike most U.S. states, Canada makes it easy to collect taxes and file the paperwork.
On the other hand, those who don’t register have at least one potential advantage. When they make a small sale to a Canadian customer–less than $20–it’s not taxed at all. Yet registered vendors are required to collect the tax on all sales, no matter how small.
For more information, go to the Canada Customs and Revenue Agency’s Web site at http://www.ccra-adrc.gc.ca.
Expanding Tax Collection
The current exemption of most interstate sales is a hot political issue. Until 1992, many states tried to force every U.S. business to collect taxes on sales to their residents. Our small Vermont publishing company, for example, received letters from Texas threatening to take us to court unless we paid $50 a year and filed massive paperwork to collect taxes on all sales to Texans. We didn’t sell enough books to Texans for the tax to even equal $50 a year, and doing this for every state would have been deadly for a business our size.
It was, therefore, a huge relief for small publishers who sell some of their books by mail when the Supreme Court ruled in Quill Corp. vs. North Dakota in 1992. Since then, states have been allowed to collect sales taxes only from companies located (or with a significant physical presence, or “nexus”) within their borders.
The decision was a setback, though, for brick-and-mortar stores, including independent booksellers, because the taxes they have to collect put them at a competitive disadvantage. Also, state and local governments are understandably unhappy about the huge loss of revenue.
These issues have been magnified by the growth of mail-order sales through Web-based businesses to the point where Congress now faces huge lobbying pressure to adopt a method of taxing interstate sales. Some of the proposals would allow interstate compacts for tax collection, while others call for a federal sales tax, with proceeds distributed to the states. Fortunately, every major proposal seeks a uniform, simplified system rather than a patchwork of different rates and rules for 50 states and thousands of municipalities. And most of the proposals exempt businesses with less than a few million dollars in sales.
Within the next few years, such legislation will probably pass, eliminating the competitive advantage big Web-based companies and other mail-order companies have over local stores. Judging from the deliberations to date, small publishers have reason to hope that the new rules will be structured to avoid undue complications and unfair burdens for our businesses.
Steve Carlson is President of Upper Access, Inc. His duties include book publishing, development of Publishers’ Assistant business software, and publicity services for other publishers. For more info on the services offered by Upper Access, visit http://www.upperaccess.com or email firstname.lastname@example.org.