A Physical Presence Can Be a Factor in Online Sales Taxes

Most states impose a sales tax on all in-state sales of goods and services. Although these taxes are levied on the buyer, not the seller, in many cases the seller is responsible for collecting these taxes from buyers and forwarding them to state tax authorities. Online marketing has changed the dynamics of this process, costing states billions of dollars in lost revenue.

Out-of-State Sellers

The buyer's state collects sales tax based on a percentage of the value of the purchase. If the seller is located in the same state as the buyer, the seller must collect the tax from the buyer and forward it to state tax authorities. If the buyer is not located in the same state as the seller, the buyer is solely responsible for reporting the purchase on a state tax return and paying the tax. Sales taxes paid directly by the buyer are known as "use taxes."

States Have Limited Power

In the 1992 case of Quill Corporation v. North Dakota, the U.S. Supreme Court ruled that states cannot force out-of-state sellers to collect sales tax unless they have a physical presence in the state. The Court did not define "physical presence" with absolute precision, however. While an in-state shop or warehouse is likely considered a physical presence, a company having in-state employees or commission-only salespeople soliciting business in the state may or may not be considered a physical presence. A web site that is visible in the buyer's state is not a "physical presence." This allows many online retailers to escape the obligation to collect sales tax.

State Laws are Inconsistent

State laws are changing rapidly with respect to the collection of sales tax by online retailers. California requires online retailers with an in-state physical presence to collect sales tax from buyers and pay them to the buyer's state tax authorities. Illinois requires out-of-state online retailers working with in-state affiliates to collect and pay sales tax for in-state buyers. More than a dozen states have passed some type of legislation to force online retailers to collect sales tax from buyers. By contrast, as of early 2012, Alaska, Delaware, Hawaii, Montana, New Hampshire, and Oregon did not even have a sales tax.

Changes May Be Coming

Since states are losing money from online buyers who don't report their purchases or pay tax, it is likely that many more states will tighten their grips on online retailers, to the extent permitted. The U.S. Congress is considering legislation that would give states broader authority to force online retailers to collect sales tax. Such legislation, however, cannot overrule a U.S. Supreme Court decision.

A Tax Lawyer Can Help

The law surrounding sales tax for online purchases of goods and service is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.

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