Cameron Miranda
The taxation of internet sales is a complex and evolving area of law, with no federal mandate currently in place in the United States. Instead, individual states have the authority to implement their own remote sales tax laws, leading to a varied landscape of rules and rates across the country. This situation has come about due to a 2018 Supreme Court decision in South Dakota v. Wayfair, which overruled the requirement for a physical presence in a state to impose tax collection duties. As a result, states have been increasingly imposing sales tax on online purchases, with 45 states and the District of Columbia now requiring remote sales tax collection. This development has been driven in part by the desire to capture tax revenue from the growing number of online transactions and level the playing field for brick-and-mortar retailers, who have seen their business undercut by untaxed online competitors. However, the lack of consistent federal legislation has made compliance challenging for businesses, particularly smaller ones, that sell across multiple states.
| Characteristics | Values |
|---|---|
| Sales tax | Charged by the retailer and submitted to the state government |
| Use tax | Charged directly to the consumer and submitted to the state government |
| Internet sales tax | A sales and use tax collected and remitted on remote sales, many done online |
| Nexus | A retailer's presence in a state, which can be established physically or through affiliate, click-through, or economic nexus laws |
| State laws | Vary across the US, with some states charging sales tax on internet purchases and others not |
| Federal law | No federal law exists regarding internet sales tax, allowing states to set their own rules |
| Customer location | If a customer lives in a state with sales tax requirements, the business may need to collect sales tax even without a physical presence in that state |
| Physical presence | A business with a physical presence in a state that charges sales tax must charge sales tax on items sold to customers within that state |
| Online retailers | May use subsidiaries to avoid sales tax in certain states |
| Compliance | Businesses should familiarize themselves with tax obligations in different states to ensure compliance |
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What You'll Learn
Nexus laws and physical presence
Nexus laws refer to the connection between a business and a state or local government that triggers the requirement for the business to collect and remit sales tax. This connection is established when a business has a physical presence in a state, such as a brick-and-mortar store or warehouse. In the past, a physical presence was required for a business to be considered to have a nexus with a state for sales tax purposes. However, with the rise of internet commerce, this has changed.
In 2018, the U.S. Supreme Court issued a decision in South Dakota v. Wayfair, Inc., which addressed South Dakota's economic nexus law. This decision overruled the physical presence rule as a necessary requirement for a sales tax nexus, allowing states to require tax collection from online retailers and other remote sellers without a physical presence in their state. This decision was based on the Due Process Clause, which requires a minimum connection between a state and the entity it taxes, and the Commerce Clause, which requires a "substantial nexus".
Following this decision, states have re-evaluated their nexus laws and many have enacted economic nexus legislation, which looks at economic activity within a state to determine if a business has nexus. This may include a certain number of transactions or a specified level of sales or revenue within the state. For example, Wayfair mandated that businesses collect and remit sales taxes on transactions in any state where they conduct more than 200 transactions or $100,000 worth of sales per year. This has made it easier for states to collect sales tax revenues from online sales, but more challenging for businesses to comply with the varying rules and regulations of multiple states.
It is important to note that nexus laws and physical presence requirements can vary from state to state, and businesses must stay up-to-date on the changing regulations and interpretations. While physical presence is no longer the sole determining factor, it is still a key consideration in establishing nexus.
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State sales tax
Historically, physical presence was a key factor in determining whether an online retailer was required to collect sales tax in a particular state. This changed with the South Dakota v. Wayfair, Inc. case in 2018, where the U.S. Supreme Court ruled in favour of South Dakota's economic nexus law, which allowed states to require tax collection from online retailers without a physical presence in their state. This decision prompted many states to enact similar economic nexus legislation to capture sales tax on internet purchases.
Currently, online retailers must comply with the sales tax laws of each state they operate in, which can include a physical presence or ties to an affiliate. The rate of tax varies from state to state, with typical sales tax rates ranging between 5-7% in many states. Some states may also impose additional taxes on online purchases, such as use taxes or gross receipts taxes.
To ensure compliance, online businesses should understand their tax obligations before engaging in internet sales transactions. They must also be aware of different types of nexus laws, such as click-through nexus, affiliate nexus, and economic nexus, which establish a retailer's presence in a state even without a direct physical presence.
While federal lawmakers continue to debate the issue of remote sales tax, with bills like the Marketplace Fairness Act, the Remote Transactions Parity Act, and the Online Sales Simplification Act being proposed but not yet enacted, states are taking the lead in setting their own rules. This dynamic landscape poses challenges for businesses striving to comply with the varying and evolving sales tax requirements across different states.
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Online retailers' obligations
Online retailers should be aware of their obligations regarding sales tax on internet purchases to ensure compliance with the relevant laws. The laws surrounding sales tax for online purchases are complex and vary across different states. Generally, sales tax is required to be collected by the retailer if they have a physical presence in the state of delivery, which is known as establishing a "nexus". This can include having a physical store or warehouse in the state, or even just having ties to an affiliate in the state. In some states, the nexus can be established even without a direct physical presence through click-through, affiliate, or economic nexus laws. Therefore, online retailers should carefully consider their presence in each state and understand the specific laws and tax rates applicable to their business.
If an online retailer has established nexus in a particular state, it is typically required to collect sales tax on all taxable items sold to customers within that state, regardless of whether the order is placed online or through traditional means. This means that even if an online retailer only has a physical store in a state and no online presence, it is still obliged to collect sales tax on internet purchases made by customers within that state. However, if the retailer is selling to a customer outside of its home state, it may not be required to collect sales tax from that customer, provided it does not have nexus in the customer's state.
To stay compliant, online retailers should familiarize themselves with the sales tax laws in each state where they have nexus and ensure they are registered to collect and remit sales tax accordingly. This can be challenging, as there are thousands of taxing jurisdictions in the US, and tax rates and rules can vary significantly from state to state. Online retailers should also be aware of any additional taxes that may apply to online purchases, such as use taxes or gross receipts taxes.
To address the complexities and inconsistencies in online sales tax laws, several bills have been introduced to Congress, including the Marketplace Fairness Act (MFA), the Remote Transactions Parity Act (RTPA), and the Online Sales Simplification Act (OSSA). These bills aim to establish new rules for sales tax on remote internet sales and level the playing field between traditional retail stores and online merchants. However, none of these bills have successfully passed through both the House and Senate, and federal lawmakers have yet to enact any federal legislation specifically governing online sales tax.
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Tax code compliance
To ensure compliance, businesses should understand their potential tax obligations before engaging in online sales transactions. Online retailers should be aware of click-through nexus, affiliate nexus, and economic nexus laws, which establish a retailer’s presence in a state without the retailer’s direct physical presence. The Supreme Court's decision in South Dakota v. Wayfair, Inc. in 2018 addressed this issue, overruling the physical presence rule for sales tax nexus for sales made over the internet. States now have the right to require tax collection from online retailers and other remote sellers that do not have a physical presence in their states.
The rate of tax varies from state to state, with typical sales tax rates ranging between 5-7% in many states. Some states may also require other taxes on online purchases, such as use taxes or gross receipts taxes. Businesses must also understand the point of origin of the sale, as this will determine whether sales tax is collectible by the business. If a company has nexus in the state to which the product is being shipped, sales tax should be billed, collected, and remitted to the state of the ship-to address.
To stay compliant, businesses can make use of tax automation software, which ensures the right tax rates, rules, and exemptions are instantly and accurately applied to every transaction. Alternatively, consulting an experienced business attorney can help online retailers navigate the complex world of tax code compliance.
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Bills and legislation
In the United States, the Internet sales tax landscape is complex and constantly evolving, with varying rules and regulations across different states. While the federal government has not enacted specific legislation on Internet sales tax, individual states have taken the initiative to implement their own rules.
One of the most significant developments in this area was the U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc. in 2018. This ruling overturned the previous requirement for a physical presence in a state before sales tax could be collected, giving states the authority to mandate tax collection from remote sellers without a physical presence within their borders. This decision prompted many states to redefine their sales and use tax obligations, often referred to as "nexus."
To address the lack of standardised federal legislation, several bills have been introduced to Congress over the years, including:
- The Marketplace Fairness Act (MFA): This bill aims to grant states the authority to require remote sellers to collect sales tax, regardless of their physical presence within those states, as long as the states comply with the Streamlined Sales and Use Tax Agreement. It was initially drafted in 2011 and has undergone revisions in 2013 and 2015.
- The Remote Transactions Parity Act (RTPA): While the specifics of this bill are not mentioned, it is one of the three proposed legislations aiming to establish rules for sales tax on remote Internet sales.
- The Online Sales Simplification Act (OSSA): OSSA differs from MFA and RTPA in that it requires sellers to remit sales tax to the origin state (the seller's location) rather than the destination state (purchaser's location). It also imposes a flat tax rate for remote sellers from states without sales tax and proposes the establishment of a state tax clearinghouse.
- The No Regulation without Representation Act of 2016 (HR-5893): Introduced by Congressman Jim Sensenbrenner, this bill aims to reinforce the physical presence requirement for nexus. If enacted, it could prevent states from imposing nexus based on criteria such as click-through and affiliate nexus.
Despite these proposed bills, federal lawmakers are yet to enact comprehensive legislation regarding Internet sales tax. In the absence of federal standards, states continue to interpret and apply sales tax nexus rules independently, often relaxing physical presence requirements and adopting provisions that shift the collection burden to online platforms.
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Frequently asked questions
Generally, if an online retailer has a physical presence in a state that charges a sales tax, then that retailer must charge sales tax on items sold to customers within that state. However, if the retailer is selling to a customer outside of its home state, it is not required to collect sales tax from that customer.
An internet sales tax is a sales and use tax collected and remitted on remote sales, many of which are done online.
When it is a sales tax, the retailer hands over the money to the state government, while a use tax is handed over directly by the consumer.
In the US, there is no federal law regarding sales tax on internet purchases. However, 45 states with statewide sales taxes have adopted collection and remittance obligations for remote sellers, and 40 have implemented marketplace facilitator regimes.
Nexus refers to a retailer's presence in a state. Online retailers should be aware of click-through nexus, affiliate nexus, and economic nexus laws, which establish a retailer's presence in a state without the retailer's direct physical presence.
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