If you are selling goods or products online and some of your customers are located in New Jersey, 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 New Jersey. 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.
While there may be no clear statement in New Jersey’s sales tax statutes or administrative rules regarding how physical presence is defined specifically under New Jersey law, other authoritative sources do affirm that physical presence, as described in Quill, is the determining factor. For example, in 2005, a New Jersey appeals court addressed the issue of whether the physical-presence rule for state sales taxes also applied to New Jersey’s corporate business tax. In reaching its ultimate conclusion, the court repeatedly affirmed that the physical-presence rule from Quill is the standard for requiring a business to collect and remit sales tax. This decision, subsequently affirmed by the New Jersey Supreme Court, has since been reported by the New Jersey Department of the Treasury’s Division of Taxation (DOT) both on a webpage, updated as recently as 2010, and in a 2005 newsletter.
In addition, a DOT bulletin from 2011 covering mail-order and Internet sales states, “If you maintain any place of business in New Jersey, operate a Web site from a location within New Jersey, have employees working in this State, or own any business property here such as a warehouse or showroom, you have a physical presence in New Jersey and must register and collect New Jersey sales tax on all taxable transactions, including delivery charges.” The items included in this statement, with the possible exception of the reference to a New Jersey-based website, largely coincide with statements in many other states’ sales tax statutes that define physical presence or (what generally amounts to the same thing) what it means to engage in business in the state.
The same 2011 DOT bulletin goes on to state:
- “If [an] Internet retailer does not have a physical business presence in New Jersey and is not registered with the State, sales tax is not collected on items delivered into the State . . . ,” and
- Internet sellers “may not be required to collect New Jersey sales tax if their only contact with New Jersey is limited to maintaining a Web site outside this State which can be accessed by New Jersey residents; mailing catalogs, flyers, or other advertisements to potential customers in New Jersey; and/or shipping merchandise to a New Jersey destination by means of commercial common carrier, parcel post, or the United States mail.”
As the two latter statements suggest, 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 Reno, Nevada and make a sale to a customer in Elizabeth, New Jersey—a state where your business has no physical presence: You are not required to collect sales tax from the Elizabeth customer.
Example 2: You are operating solely out of a store in Trenton, New Jersey and make a sale to a customer in Paterson, New Jersey: You are required to collect sales tax from the Paterson customer.
Example 3: After several years of operating solely out of a warehouse in Reno, Nevada, you open a one-room satellite office just outside of Newark, New Jersey—a state where previously you had no physical presence. A day later, you make a sale to a customer in Jersey City, New Jersey: You are required to collect sales tax from the Jersey City customer.
In some cases, items sold via the Internet to New Jersey customers may be exempt from sales tax under New Jersey law. For example, most clothing, apart from fur, accessories, sporting equipment, and protective equipment, is exempt from sales tax. For further information, consult NJS 54:32B-8.1 through 54:32B-11, which cover virtually all exemptions. Or, for more readable alternatives, see the DOT’s New Jersey Sales Tax Guide, which includes information on many exemptions, and the DOT’s guide to sales tax exemptions; note, however, that the latter guide dates from 2007 and is currently being revised by the DOT.
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 DOT’s New Jersey Sales Tax Guide states that “when taxable items are purchased from Internet retailers or mail-order catalog companies that do not collect New Jersey sales tax, the purchaser is required to remit the use tax directly to the State of New Jersey.”
The DOT also publishes a guide strictly on the use tax, but, for Internet retailers, it may be less useful than the Sales Tax Guide.
New Jersey’s Special Amazon Agreement
As reported in various publications, as well as in a press release from the New Jersey Governor’s Office, the State reached an agreement with Amazon.com to have Amazon pay New Jersey sales tax starting no later than July 1, 2013. This was just one action in a much larger, national debate about whether Internet retailers with no physical presence in many states should nonetheless be required to pay sales tax in those states. Some states, such as Indiana and Nevada, have taken New Jersey’s approach of obtaining a special agreement with Amazon. Other states, such as New York, North Carolina, Rhode Island, and Connecticut, have passed—or tried to pass—what is commonly called an “Amazon law” which is special tax legislation that targets larger Internet retailers such as Amazon.com and Overstock.com.
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 New Jersey, as well as in other states and at the federal level. However, at this time—and putting aside the special agreement with Amazon.com—New Jersey has not enacted any law that would require out-of-state retailers to collect sales tax from New Jersey customers.
In New Jersey, the physical-presence rule continues to apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the New Jersey Department of the Treasury’s Division of Taxation 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.