If you are selling goods or products online and some of your customers are located in Minnesota, 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 Minnesota. The new federal law 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.
While the physical-presence rule may seem clear, in the case of Minnesota, as well as a fair number of other states, it is necessary to emphasize that in Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state; one type of nexus is based on the Due Process Clause of the Constitution and another type is based on the Commerce Clause of the Constitution. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was the Commerce Clause version, which—as described by the Supreme Court—means physical presence. However, many states, including Minnesota, have used the term “nexus” rather than “physical presence” in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
For basic guidance on how physical presence is defined specifically under Minnesota law, refer to Section 297A.66 of the Minnesota Statutes (M.S.), which defines “retailer maintaining a place of business in this state.” Note that the definition includes places of business controlled directly or by a subsidiary or an affiliate.
For additional guidance, consult Minnesota Revenue Notice # 00-10, “Sales & Use Tax - Nexus Standards,” issued by the Minnesota Department of Revenue (DOR). The Notice discusses in detail when an out-of-state retailer has sufficient “nexus” with the state, and therefore is required to collect and remit Minnesota sales tax. Apart from essentially restating the statutory definition of “retailer maintaining a place of business in this state," the Notice also discusses the DOR’s position that a business that “conducts business activity in Minnesota on at least four days during a 12-month period” has enough nexus with the State to require it to collect and remit sales tax; it also provides illustrative examples in this regard.
The DOR provides further information about both physical presence and “nexus” in an instruction booklet on sales tax and use tax. Also, in conjunction with Revenue Notice # 00-10, and by way of further assisting retailers, the Minnesota DOR publishes a Business Activity Questionnaire to help determine if a business has sufficient nexus with the state for sales tax purposes.
Meanwhile, and 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.
Example 1: You are operating solely out of a warehouse in Tuscaloosa, Alabama and make a sale to a customer in Duluth, Minnesota—a state where your business has no physical presence: You are not required to collect sales tax from the Duluth customer.
Example 2: You are operating solely out of an office in Saint Cloud, Minnesota and make a sale to a customer in Saint Paul, Minnesota: You are required to collect sales tax from the Saint Paul customer.
Example 3: After several years of operating solely out of a warehouse in Tuscaloosa, Alabama, you open a one-room satellite office just outside of Minneapolis, Minnesota—a state where previously you had no physical presence. A day later, you make a sale to a customer in Rochester, Minnesota: You are required to collect sales tax from the Rochester customer.
Some items sold via the Internet to Minnesota customers may be exempt from sales tax under Minnesota law. For example, under Subdivision 8 of M.S. 297A.67, clothing is exempt from sales tax. For more detailed information on tax-exempt items, consider checking the following sources:
- the section on “Nontaxable items, uses and charges” in the DOR’s instruction booklet on sales and use tax
- the various Fact Sheets on exemptions published by the DOR, indexed and linked on a DOR webpage
- Sections 297A.67, 297A.68, 297A.69, 297A.70, and 297A.71 of the Minnesota Statutes, and
- Sections 4700 through 6700 of Chapter 1830 of Minnesota Administrative Rules.
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.” The DOR publishes a detailed, readable webpage on the use tax, which states, among other things, that the use tax applies “if you [the customer] buy taxable items through mail-order catalogs or the Internet and Minnesota sales tax is not charged on the purchase.” In addition, the DOR also publishes a separate web document entitled “I Bought Something Online or Out-of-State,” which begins by stating “If you buy taxable items online or in another state, for use in Minnesota, you must pay Minnesota sales or use tax on those purchases. If the seller ships the items to you in Minnesota but does not collect Minnesota sales tax, you owe Minnesota use tax.”
The same webpage also answers the question “Why Don’t All Out-of-State Businesses Collect Use Tax?” as follows: “Out-of-state retail businesses are required to register and collect Minnesota tax if they have a physical presence in Minnesota (such as a store, warehouse, salesperson, etc.). Mail order companies and others who solicit sales in Minnesota – but have no physical presence – generally are not required to register.”
Note that the latter statement, though appearing as part of guidance on the consumer’s use tax rather than the retailer’s sales tax, is a particularly direct and simple expression of the physical-presence rule from Quill.
While you might not know it from looking solely at Minnesota’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 Minnesota has not enacted any law that would require out-of-state retailers to collect sales tax from Minnesota customers.
In Minnesota, the physical-presence rule applies for Internet retailers. However, because the issue is a subject of ongoing debate, you should consider checking in periodically with the Minnesota Department of Revenue 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.