States Making Inroads at Taxing Online Sales
by b2beditor, Performer
- Created: September 15, 2009, 4:23 pm
States that impose sales tax generally require vendors to collect the
levy on the sales that they make. In some cases, the vendor's
obligation is clear cut. When a customer walks into a store and
purchases a taxable item, the vendor must collect a sales tax in
addition to the purchase price. But what about the vendor's obligation
to collect sales tax on a remote sale? A 'remote sale' is a transaction
in which a vendor sells an item via the internet or a catalog to a
customer in another state.
Remote sales are generally not taxable if the seller lacks a
physical presence in the state in which the item is purchased. But this
area of the law has become increasingly complex as a result of recently
enacted state laws aimed at imposing sales tax on certain types of
In 1992, the U.S. Supreme Court established the 'physical presence
rule,' which states that a vendor is not required to collect sales tax
unless it has a physical presence within a jurisdiction's borders. A
physical presence has been defined to include in-state property,
employees, or an independent sales representative.
Example. For example, if ACME
Sporting Goods is based in Maryland and sells a soccer ball via its web
site to a customer in Illinois, ACME would be required to collect
Illinois sales tax if it had a store or employees in Illinois. However,
if ACME lacked a physical presence in Illinois, the state could not
require it to collect its sales tax.
As more remote sales transactions have been conducted online over
the past decade by retailers such as Amazon, states have looked for
ways to tax online sales in a manner that satisfies the physical
Most states cannot impose sales tax on their residents' purchases
from Amazon or other online retailers because many times the companies
are not physically present in their jurisdiction.
Independent Affiliates. However,
several online retailers have come to rely on independent web sites
known as affiliates to promote sales. An affiliate will place a link on
its website to the retailer's site and receive a commission if someone
follows the link and buys something from the retailer.
Last year, New York enacted a law that presumes that an online
retailer is subject to the state's sales tax collection requirements if
it collects more than $10,000 in annual revenue from a New York-based
affiliate. The law does not merely impose tax on the commissions earned
by the affiliate, but the online retailer's total in-state sales.
Other states have taken note and have followed suit. Rhode Island and North Carolina have enacted similar measures this year.
What does all this mean to you? Depending on the circumstances, online sales can be subject to sales tax.
Think carefully about your sales tax obligations when selling
products online or earning commissions through an 'affiliate
relationship' with a retailer.
For an informative guide to starting an online business, check out this primer.
Steven Roll is a senior tax law editor with BNA Tax & Accounting (bnatax.com)
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