Today’s question was not emailed but asked in person at BlogHer! It was asked after my session, so I thought I’d post it for the benefit of everyone.
Taxpayer asks: Do I have to pay sales tax on sales through my web site?
Taxgirl says: This is such a loaded question. I’ll start off by making a quick correction – not to be picky but to make an important point. The seller of products never “pays” sales tax due on the sale of a product – the seller collects and remits payments. Those are two different things (and in some states, it’s actually a crime not to collect the tax and to pay it yourself). So, keep in mind throughout this discussion, that this tax is not yours to pay but to collect from the buyer and pass along to the authorities.
Whether you’re responsible for collecting this tax is subject to a couple of factors:
1. Where you’re located; and
2. Where you sell.
The first bit is fairly simple to figure out. Most states focus their tax laws (since sales tax is a state and local issue, not a nationally or internationally governed tax) on your actual physical location. If you are sitting in your home in North Carolina selling baubles over the internet, you are considered to be located in North Carolina – even if your internet server is in Missouri and you ship out of Connecticut. This means, with few exceptions, that you are subject to the laws of the taxing authorities in that state.
And here’s my quick *aha* moment. Some states, like Delaware, do not have a sales tax. Do not be fooled into believing that you can escape sales tax merely by incorporating in a state like Delaware! Your state of incorporation does not automatically equal physical presence.
So, what does physical presence mean for sales tax purposes? Here’s the fast and loose rule: if you are physically located in State A and sell to a taxpayer in State A – even over the internet – you are responsible for collecting sales tax due to State A from the buyer. Get it?
However, if you are physically located in State A and sell to a taxpayer in State B over the internet, you are most likely not responsible for collecting sales tax. The exception to this rule has a lot to do with the amount of “physical presence” you might have in State B. If you never actually do business in State B beyond selling to someone over the internet, there is probably no physical presence.
But what if…
What if you travel to State B for a book tour? Or to tout your wares at a fair or convention? Or you open an office in State B? It’s important to realize that you don’t automatically subject yourself to sales tax “nexus” (the legal term for physical presence) just by making an appearance. But if your marketing, promotional and other business activities in State B are extensive, it could be perceived that you have a physical presence in that state and you could be subject to sales tax.
I always refer my clients to the order forms in the middle of catalogs for comparison. You know how it will say, “NY residents must pay sales tax” or you’ll see a list of four or five states whose residents must pay sales tax and no one else has to pay? This “physical presence test” is exactly what’s going on. The state where the company is located must collect sales tax from consumers in that state – there’s no getting around physical presence in that instance. Other states where the company must collect sales tax are likely states where the company has satellite locations, sales forces or other substantial presence. However, just mailing a catalog to another state – or soliciting via the internet – will generally not be enough to suck you in and subject you to sales tax.
And as to international destinations? I don’t profess to know the laws in every country around the world. But you can more or less count on the fact that sales tax is a state and local rule and selling products to residents of countries outside of the US probably does not subject you to sales tax.
Of course, I have to add some disclaimers:
First, this is such a fact specific area. Don’t make life changing corporate decisions based on an article on a web site (no matter how wonderfully written). If you have serious concerns about your tax liability, contact a local tax professional.
Second, this is the state of the law as of this very minute. Every day, it seems, someone is proposing some variation of an internet commerce tax – whether state, local, national or international. There’s a lot of confusion and a lot of gray area because, let’s face it, the internet is an enormous and often nebulous place. But this is more or less the state of the law today.
Third, if you are subject to sales tax, the laws for collecting and remitting the tax vary from state to state. If you think you should be collecting sales tax, contact a local tax professional or your local Department of Revenue for more information.
–
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the Taxgirl!
