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Rhode Island Legal Blog

Monday, August 8, 2016

When Must a Business Charge Sales Tax on Out-of-State Purchases?

A 1992 Supreme Court decision Quill Corp. v. North Dakota established the principle that an out-of-state retailer does not have to collect state sales tax if it does not have a physical location—a store, business office, or warehouse—in the state where the purchase originated.

Theoretically, the consumer placing the order in a state that has a sales tax could be responsible for paying the tax on an out-of-state order.  An out-of-state retailer can voluntarily collect sales tax and remit it to the state, but there is no legal obligation for it to do so.  Because requiring consumers to "self-report" on large numbers of small transactions is burdensome, states generally do not do it, except on very expensive out-of-state purchases.

 

Sales Taxes on Online Transactions 

The long-established principle that out-of-state stores with no in-state presence need not collect sales tax has been challenged in the Internet era.  Many brick-and-mortar businesses have complained that out-of-state online companies have an unfair advantage because they do not have to charge customers sales tax.  States have also lost billions in sales tax revenue to tax-free online orders. 

In 2008, New York enacted the so-called "Amazon Tax" forcing Amazon and similar e-tailers to collect sales tax.  New York got around the Quill requirement of a physical presence in the state because Amazon has countless affiliates and "associates" marketing products through it, and some of those are located in New York.  Other states have enacted similar laws.  Illinois, for example, passed the "Main Street Fairness Act" targeting online retailers with affiliates in Illinois.  Currently Amazon collects sales tax in 23 states.

Some online retailers, such as Overstock.com, have cancelled affiliate programs in states with an "Amazon Tax" to avoid having to collect state sales taxes.

 

Which States Have an "Amazon Tax"?

Currently 23 states have sales taxes on online retailers like Amazon:

Arizona

California

Connecticut

Florida

Georgia

Indiana

Kansas

Kentucky

Maryland

Massachusetts

Minnesota

Nevada

New Jersey

New York

North Carolina

North Dakota

Pennsylvania

Tennessee

Texas

Virginia

Washington

West Virginia

Wisconsin

South Carolina will start collecting tax in 2016.  Five states have no sales tax at all -- Alaska, Delaware, Montana, New Hampshire, and Oregon.  Others have yet to target online businesses.

 

Summary

Businesses online or off that have no physical connection to a state, other than shipping products to it, are generally shielded from having to collect sales tax by Quill.  Businesses that have a physical presence in a state may have to collect sales tax if required by state law.  Those with no physical presence but with representatives, affiliates or associates in a state may be required to collect state sales tax by laws like the Amazon Tax.  An experienced business law attorney can assist you in determining whether you are obligated to collect sales taxes.


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