If you are selling goods or products online and some of your customers are located in Maine, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, 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.
Below is an article on the current rules on Internet sales tax in Maine. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
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 such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For guidance on how physical presence is determined specifically under Maine law, you can consult Section 1754-B of Title 36 of the Maine Revised Statutes, covering registration of sellers, for sales tax purposes, with the State of Maine.
Additional, and likely more readable, guidance is available from the Reference Guide on the state’s sales and use tax law published by the Sales, Fuel & Special Tax Division of the Maine Revenue Service (MRS). Starting at page 93, the Guide covers in detail the ten categories of sellers required to register for a tax certificate and collect sales tax. As the Guide states at one point, “Having any type of physical presence or nexus in this State, such as operating or maintaining a store, warehouse, office or repair facility, requires registration. If the retailer does no more than solicit sales by means of a catalog mailed into the State and the goods are delivered by common or contract carrier or the US mail, registration is not required.” In addition, a FAQ answer from the MRS states that “Sales made over the Internet are subject to the same sales tax application [i.e., rules] as mail order sales”—a statement that accurately tracks with the decision in Quill.
As you might expect, 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.
A Note on “Nexus”
In its Quill decision, the United States Supreme Court discusses not only physical presence, but also several types of potential “nexus” between a business and a state, including one type based on the Due Process Clause of the Constitution and another type based on the Commerce Clause of the Constitution. The type of “nexus” (or connection) the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which, for all practical purposes, is physical presence.
In line with Quill, the Maine Revenue Service largely tends to equate physical presence and nexus. More particularly, in a discussion of catalog and Internet sales at page 66 of its Reference Guide, the MRS states that “A retailer that solicits sales through a catalog or Internet web site must collect tax on sales made to customers in Maine if the retailer has ‘nexus’ (a substantial physical presence) in Maine.” And Section 1754-B(1)(G) of the sales tax statute itself states that a seller must have “a substantial physical presence in this State sufficient to satisfy the requirements of the due process and commerce clauses of the United States Constitution,” and goes on to state that “Solicitation of business in this State through catalogs, flyers, telephone or electronic media,” when goods are delivered by a “common carrier” (i.e., U.S. mail, UPS, Fedex, or the like), does not constitute substantial physical presence.
Example 1: You are operating solely out of a warehouse in Honolulu, Hawaii and make a sale to a customer in Augusta, Maine—a state where your business has no physical presence: You are not required to collect sales tax from the Augusta customer.
Example 2: You are operating solely out of an office in South Portland, Maine and make a sale to a customer in Lewiston, Maine: You are required to collect sales tax from the Lewiston customer.
Example 3: After several years of operating solely out of a warehouse in Honolulu, Hawaii, you open a one-room satellite office just outside of Portland, Maine—a state where previously you had no physical presence. A day later, you make a sale to a customer in Bangor, Maine: You are required to collect sales tax from the Bangor customer.
Some items sold via the Internet to Maine customers may be exempt from sales tax under Maine law. For example, Section 1760-5(A) of the Maine sales and use tax statute states that hearing aids and corrective lenses for eyeglasses are exempt from sales tax. For further information on exemptions, check generally the various parts of Section 1760 of the sales tax statute, or, as a more readable alternative, the section on Exempt Goods starting at page 53 of the MRS Reference Guide on the sales and use tax.
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.” This responsibility is codified in Maine law starting at Section 1861 of the state’s sales and use tax statute. The MRS also publishes a short, readable guide on the use tax. As the guide states, the most common sort of transaction subject to use tax is purchasing goods from an out-of-state vendor “by mail order or by taking delivery” out-of-state but then bringing the goods to Maine for use there. Keeping the Quill decision in mind (see above), it seems clear that purchases from out-of-state Internet sellers without a physical presence in Maine would also be subject to use tax.
While you might not know it from looking solely at Maine’s sales tax statute, 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. However, at this time Maine has not enacted any law that would require out-of-state retailers to collect sales tax from Maine customers.
In Maine, the physical-presence rule applies for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Maine Revenue Service to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.