Online Sales Tax Rules for Ecommerce Businesses
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
- Online Sales Tax Laws by State
- Online Sales Tax & Legislation
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.
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: Affiliate Nexus
- California: Affiliate nexus - Enacted and then repealed on Sept 23, 2011 for a period of one year.
- Colorado (Law Currently Stayed) - Refer to the Web site for the Colorado Department of Revenue for the most recent information.
- Connecticut: Affiliate Nexus
- Illinois: Affiliate nexus
- New York: Affiliate Nexus
- North Carolina: Affiliate Nexus - Currently active, moving toward repeal.
- Pennsylvania: Affiliate nexus - Effective no later than February 1, 2012
- Rhode Island: Affiliate nexus - Currently active.
- 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 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
This article is not intended as legal or tax advice for businesses or consumers. If you have questions about a specific situation, be sure to contact a licensed attorney or CPA.