How to handle sales tax / VAT ?

[garyfritz]

I'm about to launch a site with a partner overseas. We'll be selling software. I expect (hope ) we'll get sales from lots of states and lots of countries.

How should I handle sales tax and VAT for sites like this?

In theory US states aren't supposed to charge sales tax for out-of-state vendors, but lots of states are doing all they can to grab revenue wherever they can. I know that submitting sales tax to different state jurisdiction is an incredible headache. I have no idea what the VAT laws are in various countries. I don't want to run afoul of the state tax agencies, the IRS, or other nations' tax authorities.

Obviously this is a problem for almost any online vendor, so surely somebody here has already solved the problem. What's the secret?

Thanks!
Gary

 

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[GlobalWealth]

Register the company offshore in a country that doesn't have a sales tax.

 

[garyfritz]

Hm. Not what I was thinking, for a couple of reasons, but I'll keep it in mind.

Is that how other people handle it? Or are you just ducking it an hoping the tax cops don't find you??

 

[Likwid24]

How should I handle sales tax and VAT for sites like this?

Obviously this is a problem for almost any online vendor, so surely somebody here has already solved the problem. What's the secret?

I'd like to know the answers to these questions too. Thanks for the question Gary.

 

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[GlobalWealth]

Is that how other people handle it? Or are you just ducking it an hoping the tax cops don't find you??

This is extremely common for web-based businesses who operate globally.

For example, if you run your business from a Cook Islands or Seychelles company, you must abide by the laws of that country. Neither collect sales or income taxes for business done outside of the country of registration.

There is much debate on whether you must collect VAT when selling to a German customer or sales tax when selling to a Ohio customer, but the trend has been to only collect tax on customers within the state/country of your company registration - hence the idea of registering in a country that collects no tax.

 

[garyfritz]

OK, say I wanted to go that direction. For a shoestring experiment it seems like overkill but I should understand the options. How much would it cost to set up a company like that, and how difficult/costly is it to administer?

If I form the business e.g. in a Cook Island LLC, what's to keep the US tax cops from looking at my website registration and saying "you're the website owner, so you're liable for the tax evasion" and locking me up? Or using other methods to trace the ownership?

Might I not get just as much actual protection by running the company from Colorado, assuming I won't get any customers from Colorado (and refusing them if necessary, or selling to them at $0 cost), then saying "we don't have to pay any sales tax on any sales outside Colorado" ? Or run it as a Wyoming LLC for even better protection and even fewer in-state customers? Or better yet, form the LLC in Oregon, where there ARE no sales taxes?

 

[GlobalWealth]

How much would it cost to set up a company like that, and how difficult/costly is it to administer?

If you are on a tight budget, go with Seychelles. Its cheaper to register a company there than in the US if done properly. FYI, I am not talking about just a basic LLC registration that costs you $100-200, I'm talking about a properly formed entity with a quality operating agreement.

If you are on such a budget that you only want to spend $200 for a company registration, then you are not likely in a business lucrative enough anyway (not picking on you specifically, just making a generalized comment for the community).

If you are interested in a Seychelles company, send me a PM. I don't do them, but I can recommend someone who does.

If I form the business e.g. in a Cook Island LLC, what's to keep the US tax cops from looking at my website registration and saying "you're the website owner, so you're liable for the tax evasion" and locking me up? Or using other methods to trace the ownership?

If you are doing business globally, then why would you host your site in the US anyway? You can have a private registration with Godaddy or 1and1 (and others) and host in a better location like Estonia.

While that may seem complicated, it really isn't. It's no different that hosting with the previously mentioned US companies. It's all online anyway.

Might I not get just as much actual protection by running the company from Colorado, assuming I won't get any customers from Colorado (and refusing them if necessary, or selling to them at $0 cost), then saying "we don't have to pay any sales tax on any sales outside Colorado" ? Or run it as a Wyoming LLC for even better protection and even fewer in-state customers? Or better yet, form the LLC in Oregon, where there ARE no sales taxes?

You are talking about different concepts here. Are you talking about privacy and protection, or taxation?

If you run the company from a WY LLC, then you would only collect sales tax on revenue from WY customers. But you would not be able to defer income tax offshore. The same holds true for any US LLC.

As for privacy and protection, CO and OR are 2 of the worst states in the US. WY is the best. Hands down. No context WY wins that battle. There are new laws in effect as of '10 that put them in the lead.

I now almost exclusively use WY LLC's for my clients. I am event domesticating (moving) clients' existing LLCs in WY now. NV is still good, but more expensive. They are following suit with similar protection and privacy laws this fall, but they are still more expensive.

I will repeat though, taking your company offshore is complicated and difficult. You need to make sure your opportunity justifies the expense and aggravation. Only you can decide this.

 

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[garyfritz]

I'm 100% looking at taxation. At this point I'm not at all worried about privacy. I just don't want to have to figure out how to submit sales tax & VAT receipts for a hundred different jurisdictions, and I don't want to ignore it and then have The Man come and nail me. I want to figure out a way to make the sales-tax problem go away.

As I said before, this is an issue that every online seller must face. Are they all using the "hope they don't catch me" approach? Hasn't somebody come up with a simple solution? I would think credit-card processors would include this as part of their service -- ask the customer for their billing address, whoops, that means we tack 3.8% onto your bill, and then they handle the tax submission.

Actually I guess some processors DO provide at least some of the solution. Paypal says their tax calculator "Adds the correct sales tax to orders." But it looks like YOU have to set up every tax rate, in every jurisdiction, manually. And then I suspect you'd still be on the hook to figure out the sales-tax submission process for every state. Urgh.

I can't believe nobody's seen an opportunity here and stepped up to provide this service for online sellers!

 

[garyfritz]

I wanted to drag this out once more and see if anybody had any suggestions.

For online sellers, who might sell to someone anywhere in the world, how do you handle sales tax and VAT???

If I base my business in Colorado, I don't have to pay US sales tax for any non-Colorado buyers. I might refuse in-state sales just to avoid having to deal with sales tax while I see how viable this business is.

But what about other countries? Value Added Tax (VAT) on Online Sales in the European Union | WilmerHale says non-EU sellers ARE REQUIRED to submit VAT. Furthermore if they're not based in the EU, they must charge the correct VAT for the buyer's country, and submit it to each individual country. That's as bad as US sales tax.

And who knows how other countries work, and what mountains of paperwork it would take to handle tax submissions in many countries. This is way too complex a problem for a small merchant to solve.

Surely there's a solution for this!! Somebody MUST have seen this as a problem waiting to be solved and provided an answer. I'm sure Amazon and other giants handle this internally, but I can't believe every small internet entrepreneur in the world is just blowing this off, hoping the tax authorities don't catch him. Are the online sellers here just hoping they don't get caught??

 

[GlobalWealth]

Surely there's a solution for this!!

There is. But those that know the answer aren't going to go on a public forum and discuss it.

 

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