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Setting Up Shop on The Web?
The Internet and the World Wide Web are becoming the New Businesses Frontier. More people are entering this arena and are finding such exciting sources of ideas and communications.
Small businesses are starting to realize that the Internet has no boundaries. They can find labor, suppliers, buyers and opportunities across the globe, often without even trying.
Knowing that you will be operating commercial ventures on the Net, what taxes will you face?
Taxes are imposed on more levels than you may realize:
- City or municipality
- County, parish, principality
- State, province or your local equivalent
- National taxes
So far, your business has faced permits, license fees, property taxes, sales taxes, city taxes, local value-added taxes, gasoline, cigarettes, alcohol, head taxes, employment or payroll taxes, labor taxes, income taxes, luxury taxes, tariffs, duties, retirement taxes, use taxes, customs fees...
What can you do to minimize the impact?
Research. Research and careful documentation of your plan of action. Take into account the kinds of tariffs and tax treaties you face going into the primary countries to which you will be selling. From which countries can you ship to have the lowest tariffs and fees?
If you are selling air (use of a site or something on your site on the Net), you are completely free to locate your business anywhere on the globe. Your only restrictions are the politics and regulations of the country you choose for setting up a cyber shop.
Is shopping around worth the trouble?
Consider this example:
Doing business selling a product in the City of Los, Angeles, in Los Angeles County, in the State of California, in the United States of America means the following taxes (if you have no employees):
- City Business license of about .2% of Gross Sales. This is before expenses - even if you have a loss.
- County Property Tax on business assets, equipment and real estate of 1.25% of purchase
price or fair market value if it declined due to earthquakes, riots and floods.
- City, county, state Sales/Use Tax of 8.25% of merchandise sold. Granted, you collect this from your customers, but it still increases your price which decreases your global competitiveness.
Taxes are lower in some adjacent California counties, so customers will drive 15-20 miles to buy higher ticket items. State Income Tax is over 9% of profits. If you are incorporated or have a limited partnership or LLC or LLP, you face minimum taxes of $US 800 to $US 3,000 per year.
- Federal (US) payroll Taxes - If you are self employed, your tax is over 15% of your earnings.
- Federal Income Taxes - 15% - 39.6%
Locating your business on the Internet and creating an S Corporation in Nevada will eliminate or reduce the following costs:
City taxes
Sales Taxes
State S-Corp Taxes
Payroll Taxes (Net)
Savings |
.20%
1.25%
1.50%
2.46 + %
5.41% |
If you are dealing with sales of $US 1,000,000 and profits of $US 250,000, including a salary of $US 50,000 your tax savings is over $US 21,500 (including payroll tax savings).
* You cannot eliminate the 9.3% State Income Tax in California. In a California S-Corporation, the profit is taxed to the shareholder. If you make it a regular C corporation - while there is no state tax, the Federal government will collect an effective 34%+ tax rate.
This will involve retaining some presence in Los Angeles, since you will be taking phone calls, handling correspondence and so forth. That's why the property taxes are still a consideration.
You minimize that by creating another company , a partnership that is paid by your Nevada corporation. Your second company only receives enough money to cover expenses. Your Nevada corporation pays you a salary.
The additional costs of stationery and bookkeeping are less than $US 2,500. You are still $US 19,000 ahead.
One caveat: taxes are fluid. Governments assess new ones all the time. There is talk of finding a way to tax Internet transactions based on where they originate or end. When they come up with new taxes - we'll come up with new solutions!
Copyright Eva Rosenberg © 1996-2002, All rights reserved
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Eva Rosenberg, EA, MBA, has been preparing taxes long enough to remember income averaging and interest deductions.
Her Encino, CA, tax practice focuses on non-filers and the self-employed. The Tax Tips columnist for Self-Employed America, Eva is also the resident tax expert for several organizations on the Internet, the author or co-author of several books and articles. She has taught at UCLA, USC, UCI, CSUF and is a sought-after speaker at conventions, tax seminars, workshops, radio and television. She does a "stand-up tax" routine that is both informative and funny.
Eva is frequently consulted by EAs, CPAs, attorneys and her former students regarding audits and Tax Court petitions. A Member of NAEA for over a decade, Eva has served on the CSEA state board and the San Fernando Valley Chapter's board.
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