One of the most frequently asked questions e-commerce attorneys receive is whether the business is responsible to collect sales tax for its out-of-state sales of goods. “Sales tax” is imposed on a seller’s receipts from retail sales of tangible personal property (tangible personal property does not include real estate, stocks, bonds, or other “paper” assets representing an interest). The term sales tax actually is a combination of “occupation” taxes that are imposed on sellers’ receipts and “use” taxes that are imposed on amounts paid by purchasers. The use tax is imposed on consumers of tangible personal property that is used, consumed, or stored in the consumer’s state. Use tax applies to purchases from out-of-state retailers that are not required to collect tax on their sales. Either sales tax or use tax will apply to a single transaction, but not both.
If an Internet business has a physical presence in a particular state, it must collect sales tax from customers in that state. A physical presence can be permanent, such as maintaining a business office, store or warehouse in that state, or having any employees or independent agents that are located in that state. If a business does not have a physical presence in a state, it is generally not required to collect sales tax for sales generated from that state. This rule is derived from the United States Supreme Court decision, Quill v. North Dakota (1992).
A business can establish a temporary presence in another state as well. Visiting customers or prospects in another state, attending trade shows or conventions, or even consigned inventory in warehouses, may constitute activities that give rise to a physical presence. A temporary nexus is created once a substantial physical presence is established.
What State Do I Owe?
Your Internet business should collect the tax for the state where the goods are delivered to your customer. If the item is shipped to the customer, then tax applies for the delivery state. You should collect the tax only if you are registered to collect tax in that state. If the customer picks up the item at any physical location of the business, tax should be collected for that state. If your business is required to register to do business in another state, it must register with that state’s department of revenue and file an income tax return. Typically, your business will be issued a sales tax license for that state and given a numeric tax identification number. Every business with a state sales tax license is required to file a return even though no sales were made during the period covered by the return.