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. 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 Utah. A new federal law would affect all state Internet sales tax laws so be sure to check for updates in this area.
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 Utah, as well as quite a few 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 Utah, 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.
For guidance on how physical presence is defined specifically under Utah law, consult Section 59-12-107 of the Utah Code, which explains in detail 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.
Additional, plain-English guidance on these same points is available in a recent publication of the Utah State Tax Commission (STC), “Business Activity and Nexus in Utah,” which discusses “nexus” as it relates to, among other things, Utah sales tax; while easier to read than the statute, the document essentially restates the same information.
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 Detroit, Michigan and make a sale 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 operating solely out of an office in Provo, Utah and make a sale 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 to a customer in Ogden, Utah: You are required to collect sales tax from the Ogden customer.
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. More generally, you can find information on exempt items in the various subsections of Utah Code 59-12-104, as well as information on exempt purchasers.
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 STC publishes a webpage discussing use tax in connection with Internet purchases; it states that, “If you purchase online or through a mail order from an out-of-state business, you must still pay Utah sales tax. If the tax was not paid to the business at the time of purchase, you must pay it with your Utah individual income tax return.”
While you might not know it from looking solely at Utah’s sales 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 Utah has not enacted any law that would require out-of-state retailers to collect sales tax from Utah customers.
In Utah, 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 Utah State Tax Commission 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.