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. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. New Jersey is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
The current default rule in 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, physical presence means having:
a warehouse in the state
a store in the state
an office in the state, or
a sales representative in the state.
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. However, New Jersey has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see New Jersey's Amazon law, below).
Examples of Physical Presence
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 (with the exception of sellers who fall under New Jersey's Amazon laws).
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.
New Jersey adopted new laws in 2014 which require larger Internet sellers with no physical presence in the state to collect and pay sales tax under certain conditions. More specifically, an out-of-state seller must collect sales tax from New Jersey customers if that seller:
has an agreement with a business or seller located in New Jersey to pay for customer referrals obtained via a link on the New Jersey seller's website (a "click-through" arrangement), and
the out-of-state seller’s gross receipts from these sales to New Jersey customers exceeds $10,000 during the preceding four calendar quarters.
Similar laws have been enacted in other states; they are commonly referred to as Amazon Laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don't pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. In response, some states have enacted Amazon laws to try to reduce this loss.
New Jersey's Amazon law is codified as NJS 54:32B-2(i)(1)(C). You may find it easiest to start by looking at the DOT’s online explanation. You can also find a mention of the law in the DOT bulletin from 2015 covering mail order and Internet sales.
Note: In 2012, as reported in various publications, as well as in a press release from the New Jersey Governor’s Office, New Jersey reached an agreement with Amazon.com to have Amazon pay New Jersey sales tax starting no later than July 1, 2013. This agreement was relatively unusual at the time. That agreement predates the more general 2014 law.
Although New Jersey’s statutes do not directly address how physical presence is defined for purposes of collecting sales tax, it seems that the default physical presence rule from Quill is the determining factor. In 2005, a New Jersey appeals court ruled that the physical presence rule from Quill is the standard for requiring a business to collect and remit sales tax. That decision, affirmed by the New Jersey Supreme Court, is referenced on the New Jersey Department of the Treasury’s Division of Taxation (DOT) website (updated in 2014) and in a 2005 newsletter.
A DOT bulletin from 2015 covering mail order and Internet sales defines physical presence for purposes of collecting sales tax as follows: “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.” These items coincide with many other states’ sales tax statutes that define physical presence or what it means to engage in business in the state.
With respect to out-of-state Internet retailers, the 2015 DOT bulletin states that:
“If [an] Internet retailer does not have a physical business presence in New Jersey and is not registered with the State, the seller does not collect sales tax 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.”
Accordingly, if you do not have a physical presence in New Jersey, you generally are not required to collect sales tax for an Internet-based sale to someone in the state, unless you fall under New Jersey's Amazon laws.
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 (this guide dates from 2007 and is currently being revised by the DOT).
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 sellers, it may be less useful than the Sales Tax Guide.
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.
For most small online businesses, it is the long-established physical presence rule that will apply. However, because Internet sales tax is a subject of ongoing debate, 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.
Last updated: April 13, 2016