If you are selling goods or products online and some of your customers are located in Idaho, you need to be aware of the state’s Internet sales tax rules. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a physical presence. The physical presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail order businesses to collect sales tax on out-of-state sales. The decision has been extended to include online retailers. Generally speaking, a physical presence means having:
The corollary to the physical presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Examples of Physical Presence
Example 1: You are operating solely out of a warehouse in Columbia, South Carolina and make a sale to a customer in Coeur d'Alene, Idaho—a state where your business has no physical presence: You are not required to collect sales tax from the Coeur d'Alene customer.
Example 2: You are operating solely out of a store in Pocatello, Idaho and make a sale to a customer in Nampa, Idaho: You are required to collect sales tax from the Nampa customer.
Example 3: After several years of operating solely out of a warehouse in Columbia, South Carolina, you open a one-room satellite office just outside of Boise, Idaho—a state where previously you had no physical presence. A day later, you make a sale to a customer in Idaho Falls, Idaho: You are required to collect sales tax from the Idaho Falls customer.
Physical Presence and Nexus in Idaho
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Idaho, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
For guidance on how physical presence is determined specifically under Idaho law, consult:
A limited number of items sold via the Internet to Idaho customers may be exempt from sales tax under Idaho law. For example, under Rule 077 of Section 35.01.02 of the Idaho Administrative Code, some items sold for use at the Idaho National Laboratory are exempt from sales tax. For further information, check through Section 35.01.02 of the Idaho Administrative Code.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a use tax. For additional information, see the Idaho State Tax Commission’s webpage on the state’s use tax. The webpage states that some online retailers without a presence in Idaho are not required to collect sales tax. In addition, the webpage states that items bought on the Internet, among other places, are subject to sales tax, and if it’s not charged then the buyer owes use tax.
Proposed Federal Legislation
At the federal level, Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. At this time, however, Idaho has not enacted any law that would require out-of-state retailers with no physical presence in the state to collect sales tax from Idaho customers. Because the issue has been contentious in many places around the country, you should consider checking in periodically with the Idaho State Tax Commission to see if the rules have changed.
Updated: April 27, 2016