If your business does sales over the internet, you may think that you are not required to collect state sales taxes, or you may have forgotten about state sales taxes altogether. However, in certain circumstances, depending on state law, your business may be required to collect state sales tax on some or all of your sales.
The general national rule-of-thumb for determining whether an internet-based company is required to collect state sales taxes on sales to customers in a particular state is the “nexus” test — if a company has a “nexus” in a state, it is required to collect sales taxes. So far, the Supreme Court has only identified physical presence (i.e., offices, warehouses, employees) in a particular state as sufficient for establishing nexus within a state, although some state taxing authorities have put out guidelines and memoranda that seem to suggest that they consider “nexus” to encompass a broader category of contacts that just physical presence. However, as physical presence is the class of contacts explicitly identified by the Court as establishing nexus, the rule-of-thumb is that having a physical presence in a state will obligate an internet company to collect sales tax on sales to customers in that state.
If a company is not required to collect sales tax, customers are then required to pay the tax on their internet purchases — commonly known as a “use” tax. However, in practice many consumers neglect to pay this tax, and as a result states lose out on a not-insignificant amount of revenue. Consequently, some states have taken to passing what have popularly become known as “Amazon laws” — so-called because they target the lost tax revenue due to sales on websites such as Amazon.com.
Most Amazon laws take on one of two forms. In the first form, an online-sales company is merely required to post a conspicuous notice on its order pages notifying customers that the company is not collecting sales tax and reminding those customers that it is therefore their responsibility to pay any applicable use tax. The second, stronger form of Amazon laws requires internet-sales companies to collect sales tax if three criteria are met:
– The company has a “click-through” arrangement with a resident (natural person or company) of the state. In a click-through arrangement, users/customers are redirected from the resident’s site to the company’s site to make their purchase.
– The resident is compensated for the click-through arrangement
– The company does a minimum amount of sales, which varies depending on the particular state
Finally, the U.S. Congress has for several years been considering a series of bills under the title “Marketplace Fairness Act” that would require online retailers to collect state sales tax in every state, provided that states comply with certain guidelines for streamlining the calculation and collection of sales tax. While there is currently a version of the bill in the Senate Finance Committee, previous versions of the bill have yet to even make it through both houses of Congress.