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Tax liability for online businesses in D.C.

On Behalf of | Oct 21, 2021 | Tax Law |

The internet has created massive opportunities for businesses to thrive. Interaction between businesses and customers has never been easier, and as a result, online companies have become very lucrative. As expected, high yields and return on investment attract some form of taxation.

Let’s have a look at what it means to have an online business in the District of Columbia, including the associated tax implications. 

Implications of the new sales tax in D.C.

According to the Supreme Court ruling on Wayfair vs. South Dakota, states can collect sales taxes from online traders even though they do not have a physical location in the same state. The ruling revoked the court’s 1992 decision on Quill vs. North Dakota that prohibited the state’s interference with interstate trading unless authorized by Congress.

The new online sales tax law, which took effect in 2019, does not govern all states. Of the 50 states, only 45 pay online sales tax. Online businesses in D.C. with $100,000 of sales, or more than 200 sales transactions, are subject to a 6% sales tax. If you’re a merchant in D.C., be sure to factor in sales tax in your purchasing price.  

The tax liability is solely on the business, and income generated is not considered as the merchant’s personal income.

How to file taxes for your online business in D.C.

Filing taxes in D.C. is easily done online. First, you need to apply for a free sales tax permit with the following requirements:

  • Social security number of all authorized account holders
  • Business address
  • The legal form of the business, i.e., corporation, partnership, or sole proprietor
  • Personal information of business partners, including name, address, title, and social security number
  • Addresses for the locations you intend to collect sales tax

With a sales tax permit, collecting taxes is simple at 6% for all sales. When filing sales tax, calculate how much you owe, and file either yearly, quarterly, or monthly by filling out the designated form. Filing can be done either online or by mail. 

What is the penalty for online business tax evasion in D.C.?

The IRS is vigilant about tax evasion of any form. Failure to pay sales tax is considered a misdemeanor and carries a penalty of up to $25,000 in fines and up to a year of jail time. Compliance with the law is your duty as a citizen and business owner.