If you are selling goods or products over the Internet to customers located in Rhode Island, you should take time to learn about Rhode Island’s Internet sales tax rules. These rules have been a matter of some debate in Rhode Island, as well as in other states and at the federal level. More particularly, in 2009, Rhode Island enacted special legislation that effectively forces larger, ostensibly out-of-state Internet retailers to collect and pay sales tax.
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 Rhode Island. 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 Rhode Island, as well as a fair number of other states, this 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 Rhode Island, 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.
The definition of physical presence—or nexus—specifically under Rhode Island law has become more complicated since new state legislation was passed in 2009. However, you can find initial guidance by referring to Section 44-18-23 of the Rhode Island General Laws (R.I. Gen. Laws), which defines the term “engaging in business in this state.” The definition includes places of business in the state maintained directly or indirectly or through a subsidiary, representative, or agent, as well as certain forms of “regular or systematic solicitation of sales.” Similar guidance is contained in the definition of “engaging in business in this state” in Rule 5 of Rhode Island Regulation SU 11-20.
Rhode Island’s special 2009 legislation, discussed further below, adds a new definition for “retailer” at R.I. Gen. Laws 44-18-15(2); the new definition is carried over to Rule 5 of Rhode Island Regulation SU 11-20. The new definition mentions “nexus” but not “physical presence.”
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.
The following simplified examples would apply in the absence of special state rules; keep in mind that, as of 2009, Rhode Island does have such special rules for larger Internet retailers.
Example 1: You are operating solely out of a warehouse in Lincoln, Nebraska and make a sale to a customer in Woonsocket, Rhode Island—a state where your business has no physical presence: You are not required to collect sales tax from the Woonsocket customer.
Example 2: You are operating solely out of an office in Cranston, Rhode Island and make a sale to a customer in Pawtucket, Rhode Island: You are required to collect sales tax from the Pawtucket customer.
Example 3: After several years of operating solely out of a warehouse in Lincoln, Nebraska, you open a one-room satellite office just outside of Providence, Rhode Island—a state where previously you had no physical presence. A day later, you make a sale to a customer in Warwick, Rhode Island: You are required to collect sales tax from the Warwick customer.
Some items sold via the Internet to Rhode Island customers may be exempt from sales tax under Rhode Island law. For example, most articles of clothing and footwear are exempt from sales tax. For a complete description of all tax-exempt items, review all sections of R.I. Gen. Laws 44-18-30.
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 Rhode Island Division of Taxation (DOT) publishes a short, easy-to-read guide on the state’s use tax. It states that use tax may be due on “A mail order or internet purchase could have been shipped directly to” the purchaser. For more detailed information, you can check the R.I Gen. Laws 44-18-20.
Rhode Island’s “Amazon Law”
In 2009, the Rhode Island legislature amended the definition of “retailer” in R.I. Gen. Laws 44-18-15. The change has the effect of requiring larger Internet retailers with no physical presence in Rhode Island, but meeting certain other conditions, to collect and pay Rhode Island’s sales tax. Similar laws have been at least considered, and sometimes enacted, in various states around the country; they are commonly known 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, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.
Under the 2009 law, if an out-of-state Internet retailer has what is commonly known as a “click-through” arrangement with one or more persons located in Rhode Island, and meets a few other conditions, the retailer must collect sales tax. More specifically, an out-of-state retailer needs to collect sales tax from Rhode Island customers if that retailer:
- has an agreement with a Rhode Island resident to refer potential customers to the retailer via a website link or otherwise
- compensates the Rhode Island resident for directing potential buyers to the retailer, and
- the retailer’s “cumulative gross receipts” from such directed sales to Rhode Island customers exceeds $5,000 during the preceding 12 months.
In 2009, in advance of Rhode Island’s passage of the law, Amazon.com shut down all click-through arrangements with Rhode Island residents.
For most small online businesses, it is the long-established “physical presence” rule that provides primary guidance on collecting tax on sales to customers in Rhode Island. However, the issue is contentious, as demonstrated by the Amazon Law enacted in Rhode Island in 2009. Therefore, consider checking in periodically with the Rhode Island 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.