If you are selling goods or products online and some of your customers are located in Utah, you need to be aware of the state’s Internet sales tax rules. Keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level.
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 having:
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.
Examples of Physical Presence
Example 1: You are an online retailer located in Detroit, Michigan and make a sale through your website to a customer in Orem, Utah—a state where your business has no physical presence: You are not required to collect sales tax from the Orem customer.
Example 2: You are an online retailer located in Provo, Utah and make a sale through your website to a customer in Sandy Hills, Utah: You are required to collect sales tax from the Sandy Hills customer.
Example 3: After several years of operating solely out of a warehouse in Detroit, Michigan, you open a one-room satellite office just outside of Salt Lake City, Utah—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Ogden, Utah: You are required to collect sales tax from the Ogden customer.
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Utah, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
For guidance on how physical presence is defined under Utah law, consult Section 59-12-107 of the Utah Code, which explains the various circumstances under which a seller must collect and remit sales tax. An ostensibly out-of-state business must collect and pay sales tax if it “holds a substantial ownership interest in, or is owned in whole or in substantial part by, a related seller” and the related seller would have to collect and pay sales tax; or if the ostensibly out-of-state business sells the same or similar products under the same or a similar name as another business required to pay sales tax. Otherwise, the law largely follows the rules as laid down in the Quill decision.
Additional, plain-English guidance is available in two recent publications of the Utah State Tax Commission (STC), “Business Activity and Nexus in Utah” and “Sales and Use Tax: General Information.” Both publications discuss nexus as it relates to Utah sales tax. While easier to read than the statute, the documents essentially restate the same information.
Under Utah law, certain items are exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, most food and food ingredients are exempt from sales tax. You can find information on exempt items in the various subsections of Utah Code 59-12-104, as well as information on exempt purchasers.
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 STC has a webpage and a short publication that discuss use tax. In connection with Internet purchases, the webpage states that, “If you purchased an item from an out-of-state seller, including internet . . . purchases, and the seller did not collect sales tax on that purchase, you must pay the use tax directly to the Tax Commission.”
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.
In Utah, it is the long established physical presence rule that will apply to Internet sales. Out-of-state retailers that are possibly related to in-state sellers should check the rules more carefully. This is a contentious and evolving area of law so be sure to check in periodically with the Utah State Tax Commission to see if the rules have changed.
Updated: April 14, 2016