If you are selling goods or products online and some of your customers are located in North Dakota, 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 North Dakota. 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 the physical-presence rule may seem clear, in the case of North Dakota, as well as a fair number of other states, that is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was based on the Commerce Clause of the Constitution, which—as described by the Supreme Court—means physical presence. However, many states, including North Dakota, have used the term “nexus” rather than “physical presence” in their sales tax laws in a way that arguably goes beyond physical presence.
For guidance on how physical presence—or nexus—is determined specifically under North Dakota law, consult of Section 57-40.2-01.7 of the North Dakota statutes (ND), which defines the phrase “retailer maintaining a place of business in this state.” (North Dakota’s full sales tax statute, ND 57-39.2, and full use tax statute, ND 57-40.2, are each available online in their entirety as PDF files.) The definition refers to maintaining a place of business directly or by a subsidiary.
North Dakota’s administrative rules state, with somewhat less specificity, that persons having a “nexus” with the state who make taxable sales in, or destined for, the state, must collect sales tax. (The primary administrative rules relating to sales and use taxes are available online as a single PDF file.) Elsewhere, the administrative rules define the term “remote seller” as “a retailer that does not have adequate physical presence to establish nexus in this state for sales tax purposes,” a statement which seems to equate nexus with physical presence, in line with the Quill decision.
At least one Guideline published by the North Dakota Office of State Tax Commissioner (OSTC), covering out-of-state retailers, states that, “The most common measure of nexus is a physical presence within the state,” and goes on to provide several examples specifically of “physical presence.” The Guideline, however, does not specifically address Internet-based retailers.
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 Louisville, Kentucky and make a sale to a customer in Minot, North Dakota—a state where your business has no physical presence: You are not required to collect sales tax from the Minot customer.
Example 2: You are operating solely out of an office in Bismarck, North Dakota and make a sale to a customer in Dickinson, North Dakota: You are required to collect sales tax from the Dickinson customer.
Example 3: After several years of operating solely out of a warehouse in Louisville, Kentucky, you open a one-room satellite office just outside of Fargo, North Dakota—a state where previously you had no physical presence. A day later, you make a sale to a customer in Bismarck, North Carolina: You are required to collect sales tax from the Bismarck customer.
Some items sold via the Internet to North Dakota customers may be exempt from sales tax under North Dakota law. For example, most food that is not eaten on or near the premises where it is sold is exempt from sales tax. The OSTC publishes a concise, readable Guideline on most exemptions. Alternatively, you can review Sections 57-39.2-04 through 57-39.2-04.8 of the North Dakota statutes.
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.” A Guideline published by the OSTC contains a brief section discussing the use tax. You can also check ND 57-40.2, which is the full use 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 North Dakota has not enacted any law that would require out-of-state retailers to collect sales tax from North Dakota customers.
In North Dakota, the physical-presence rule applies for Internet retailers. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the North Dakota Office of State Tax Commissioner 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.