New online sales tax may add to small business owners’ hassle

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In a recessed economy — or even a recovering one — it may make sense that lawmakers are exploring additional sources of tax revenue. The latest frontier is commonly referred to as the Internet sales tax.

Under current law, online businesses may only be required to collect tax in the states where they have their headquarters, supply warehouses or other type of physical presence. However, the U.S. Senate recently approved a bill that would allow states to impose sales tax on online retailers. For New York business owners, the change could potentially create a big administrative hassle and give rise to tax investigations or disputes.

New York lawmakers already require Internet sellers with an in-state affiliate to collect these taxes. Under the proposed legislation, states where an Internet retailer makes sales over $1 million would be fair game for the collection of sales taxes.

Individual consumers might not be as concerned about the proposed law as small business owners. Such businesses are already required to withhold Social Security, Medicare and income taxes from employee wages, and to contribute the employer’s share of payroll taxes. The proposed law would require yet another administrative task of apportioning online sales by state, to determine whether the $1 million threshold has been met. Additional complications — such as multiple states taxing an online purchase — might also arise.

Small business owners, sole proprietors and partnership entities may fear an audit, as such an investigation may overburden limited staff resources. Payroll taxes are a potential area of dispute with Internal Revenue Service auditors. Some business owners opt for administrative settlement options, such as an offer-in-compromise, simply to avoid the additional accounting expenses associated with an audit. However, a more proactive approach might involve a consultation with a New York lawyer who specializes in tax law. An attorney might have strategies for simplifying the tax responsibilities imposed on small business owners.

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