Online Sales Tax Rules & Laws

Online State Sales Tax

An online business does not have to pay sales tax on orders shipped to states where it does not have nexus, but times are changing...

An online business does not currently have to pay sales tax in states where it does not have nexus. However, the topic of online sales tax is rapidly evolving as new laws emerge with the goal of allowing states to charge sales tax by standardizing laws and rates. Some states also have existing or emerging laws that expand the scope of nexus that dictates if sales tax can be collected.


Who has to Pay Online Sales Tax, and in which states

An online business is responsible for paying sales tax in states where it has nexus. For example, an online business will have to pay sales tax on orders shipped to states where it has offices or warehouse facilities. It will not have to pay sales tax on orders shipped to states where it has no physical presence.

Consumers are responsible for paying use tax on tangible personal property that was not previously assessed sales tax by a business. For example, a person that resides in Louisiana will have to pay use tax to the state of Louisiana for personal products she purchased from an online business based in Arizona.

Businesses

Nexus determines whether an online business has to pay sales tax on orders shipped to a certain state. Nexus refers to the connection that a business has with a given state. If the business has nexus (a connection) with a state it will be responsible for collecting and paying sales tax on orders shipped to that state. Conversely, a business will not have to collect sales tax on orders shipped to a state where it does not have nexus.

Nexus: Defining Presence

Tax law is constantly evolving, so it's best to check with your tax professional regarding the current scope of nexus for various states. However, the 1992 Supreme Court ruling in the case of Quill Corp. v. North Dakota still largely defines nexus concerning sales tax. In this case, the Supreme Court ruled that a business must have a physical presence in a state for that state to require it to collect sales taxes.

Affiliate Nexus Tax

Some states have passed or are in the process of passing laws that broaden the definition of nexus to include affiliate marketers. Affiliate nexus tax laws (also called "Advertising Tax" or "Amazon Tax") require businesses to pay sales tax on orders shipped to states where it has an established presence of affiliate marketers.

Affiliate tax nexus laws have been met with fierce opposition from industry groups like the Performance Marketing Association and online retailers like Amazon.com and Overstock.com that have ended affiliate programs in states with affiliate nexus laws such as Connecticut.

Affiliate Nexus Laws by State

The following is a list of states that have current, pending or repealed laws pertaining to affiliate nexus. Quite a few states are in the process of enacting or even repealing such laws, so be sure to check with a tax professional in your state regarding your business's current tax responsibilities.

The Performance Marketing Association also has a list showing the status of affiliate nexus laws by state.

  • Arkansas:
  • California
    • Affiliate nexus: Enacted and then repealed on Sept 23, 2011 for a period of one year.
  • Colorado (Law Currently Stayed)
  • Connecticut
  • Illinois
  • New York
  • North Carolina
    • Affiliate Nexus: Currently active, moving toward repeal.
  • Pennsylvania
  • Rhode Island
  • Vermont
    • Affiliate nexus (sort of): Vermont's affiliate nexus law will not go into effect until Section (13) Sec. 36a of H.436 is fulfilled that requires fifteen other states to enact an affiliate nexus law before Vermont's law will take effect. This stipulation leads many to believe that Vermont's affiliate nexus law won't go into effect for years, if ever.

Consumers Pay Use Tax

States that collect sales tax from business also collect use tax from consumers. Use tax is assessed on untaxed tangible personal property by the state in which a person resides regardless of where the product was purchased.

Essentially, states with sales tax require residents to pay taxes on any products purchased for personal use that were not assessed sales tax by the seller at the time of purchase. Few people actually track and report use tax, and states have found enforcing use tax to be very difficult.

Online Sales Tax Laws by State

Except for the states where an affiliate nexus law is on the books, a business does not have to pay sales tax on orders shipped to states where it does not have nexus. Consumers are subject to use tax as dictated by the laws of the state in which they reside.

The complexities and inconsistencies in sales tax laws among states have served as a barrier against the implementation of an efficient and enforceable sales tax system for online purchases. Many states are looking toward the Streamlined Sales and Use Tax Agreement (SSUTA) as the system that will allow for sales tax to be charged universally on online purchases.

Online Sales Tax & Legislation

There are currently several proposed laws including the Marketplace Equity Act, Main Street Fairness Act, and Marketplace Fairness Act that aim to require online retailers to collect sales tax in a manner consistent with physical brick and mortar businesses.

The Marketplace Fairness Act was introduced in the Senate on November 9, 2011 (S.1832) by Mike Enzi (R-Wy), Lamar Alexander (R-TN), Dick Durbin (D-IL) and seven other bi-partisan Senators.

The Marketplace Equity Act was introduced in the House on October 13, 2011 (H.R. 3179) by Rep. Steve Womack (R-AR) and Rep. Jackie Speier (D-CA).

The Main Street Fairness Act was introduced in the house on July 1, 2011 (HR-5660) by Rep. John Conyers (D-MI), and in the Senate on July 29, 2011 (S.1452) by Sen. Richard Durbin (D-IL).

The differences between the two recent Main Street and Marketplace Fairness Acts are outline very well here: From Main Street to Marketplace Fairness Acts – Sales Tax 2011

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One Response to Online Sales Tax Rules & Laws

  1. John Fisher says:

    As a Pennsylvania resident and PA affiliate marketer, I am very upset and worried about the impending PA Affiliate Nexus Tax Law. This will hurt many people financially, will result in LOSS of revenue to the state from income taxes that PA affilate marketers will lose, and may even cause an additional burden to the Commonwealth of PA because some of the affilate marketers that are derving their entire livelihood from affiliate marketing may not be able to find jobs to replace their income. Thefore, I urge PA affilates to write to your state representatives at: http://www.house.state.pa.us/ and lets kill this law before it has a chance to live.

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