Sales Tax on the Internet
by
Attorney Richard Stim
When sales tax must be charged for online purchases.
The Internet takes tax-free shopping to a new level. In fact, no-tax shopping has become a prime lure of online retailers looking to hook consumers on click-and-charge buying. Despite what you sometimes hear, however, some Internet sales are subject to sales tax, and even when a site doesn't collect sales tax, consumers are technically responsible for remitting any unpaid sales tax on online purchases directly to their state.
Collecting Sales Tax: Some Sites Have To, Some Don't
If an online retailer has a physical presence in a particular state, such as a store, business office, or warehouse, it must collect sales tax from customers in that state. If a business does not have a physical presence in a state, it is not required to collect sales tax for sales into that state. This rule is derived from a 1992 Supreme Court decision which held that mail-order merchants did not need to collect sales taxes for sales into states where they did not have a physical presence.
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Margo is passionate about rare orchids but can't find them in Indiana, so she orders her supplies online from an orchid supplier with headquarters in Vermont. The supplier has all of its facilities in Vermont and collects payment in Vermont. Margo does not have to pay Indiana sales tax (or Vermont sales tax) on her orchids.
A few months later, the supplier opens a warehouse in Indiana to handle its online orders for the entire country. Margo continues to order her orchids from the headquarters in Vermont but she must now pay Indiana sales tax. Her ride on the tax-free train is over.
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For a while, some big retailers with local stores sold their products tax-free over the Internet by creating separate legal subsidiaries to handle Internet business. However, lawsuits by several states and pressure from the Streamlined Sales Tax Project (a group created by states supporting the Streamlined Sales & Use Tax Agreement, discussed below) has ended that practice of avoiding sales taxes.
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