If you use the Internet to sell goods or products to customers in Vermont, you should learn about Vermont’s Internet sales tax rules. These rules have been a matter of some debate in Vermont, as well as in other states and at the federal level. More particularly, in 2011, Vermont enacted special legislation intended to force larger, ostensibly out-of-state Internet retailers to collect and pay sales tax. However, because of its unusual terms, the Vermont legislation is not likely to take effect for years, if ever.
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 Vermont. 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.
For basic guidance on how physical presence is defined specifically under Vermont law, consult Section 9701(9) of Title 32 of the Vermont Statutes (32 V.S.A. § 9701), which provides various definitions of “Vendor,” i.e., a person or entity required to collect and remit sales tax. This section indicates, among other things, that a vendor may be someone who controls another “person” (which, in this context, can mean an individual, business, or other entity) engaged in the same or similar business in the state, or a vendor who has a franchisee or licensee operating under the vendor’s name in the state; in other words, an ostensibly out-of-state business may be liable for sales tax if it has even an indirect connection to an in-state business. (Note: links in this article are to individual sections of the “unofficial” Vermont Statutes as made available by the state legislature; it is not possible to provide direct links to individual sections of the “official” statutes in this website, though they are available online through a web portal maintained by LexisNexis.)
Most of this same information is also available in Section 1.9707-1(A) of the Vermont Sales and Use Tax Regulations, which discuss when a person must register to collect Vermont Sales tax. (While links to individual sections are apparently not available, the complete set of sales and use tax regulations is published online as a single document from a Vermont state government website.)
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. As stated on a Vermont Department of Taxes (DOT) webpage concerning use tax, “Out of state vendors are not required by law to collect the Vermont Sales tax if they have no physical presence in Vermont . . . .”
Example 1: You are operating solely out of a warehouse in Santa Fe, New Mexico and make a sale to a customer in Montpelier, Vermont—a state where your business has no physical presence: You are not required to collect sales tax from the Montpelier customer.
Example 2: You are operating solely out of an office in Rutland, Vermont and make a sale to a customer in Colchester, Vermont: You are required to collect sales tax from the Colchester customer.
Example 3: After several years of operating solely out of a warehouse in Santa Fe, New Mexico, you open a one-room satellite office just outside of Burlington, Vermont—a state where previously you had no physical presence. A day later, you make a sale to a customer in Bennington, Vermont: You are required to collect sales tax from the Bennington customer.
Under Vermont law, certain items are exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, clothing, apart from accessories, equipment, sport or recreational equipment, or protective equipment, is exempt from sales tax. More generally, you can find information on exempt items in various subsections of 32 V.S.A. 9741, and in the various subsections of Section 1.9741 of the Vermont Sales and Use Tax Regulations.
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 DOT publishes a brief, readable webpage discussing use tax. The page begins with the statement, “Have you made a purchase on-line or through a catalog? You may owe the Vermont Use Tax,” as well as stating (as mentioned above) that out-of-state vendors are not required to collect sales tax.
Vermont’s Unusual “Amazon Law”
In 2011, the Vermont legislature took two actions:
- it amended the definition of “Vendor” in 32 V.S.A. § 9701, creating what is referred to in the law as an “Internet affiliate sales tax”
- it added, as 32 V.S.A. § 9783, a new requirement for “noncollecting retailers” to give notice to their customers regarding use tax.
The first of these changes would have the effect of requiring larger Internet retailers with no physical presence in Vermont, but meeting certain other conditions—including having what is commonly known as a “click-through” arrangement with one or more persons located in Vermont—to collect and pay Vermont’s sales tax. Similar laws have been at least considered, and sometimes enacted, in various other 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.
More specifically, if and when the Internet affiliate sales tax law were to take effect, an out-of-state retailer would need to collect sales tax from Vermont customers if that retailer:
- had an agreement with a Vermont resident to refer potential customers to the retailer via a website link or otherwise
- compensated the resident or residents in Vermont for directly or indirectly referring potential buyers to the retailer, and
- the retailer’s “cumulative gross receipts” from such directed sales to Vermont customers exceeded $10,000 during the preceding tax year.
However, the Internet affiliate sales tax law is unusual in that it includes a provision stating it will not go into effect until the Vermont’s attorney general has determined that at least 15 other states have adopted “the same, substantially similar, or significantly comparable” requirements. Since 2008, when New York became the first state to enact an Amazon Law, no more than about a half dozen states have passed such laws. Consequently, it is not clear when, or if, the Vermont law would actually take effect.
Meanwhile, 32 V.S.A. § 9701 defines “noncollecting retailer” as a retailer who is not registered to collect Vermont sales tax, is not required to collect Vermont sales or use tax, and who makes sales “transferred electronically from a place of business outside Vermont to be shipped to Vermont . . . .” Such retailers are required to provide a “readily visible” “notice,” (apparently, among other places, on their websites) containing a variety of information, including about the possibility of use tax being due, and purchases not being exempt merely because they are made over the Internet. For full details regarding what information must be presented, and where, consult the statute.
In 2011, Vermont passed legislation aimed at out-of-state Internet retailers, including an Amazon Law with a delayed starting date, and a separate law requiring those retailers to provide clear notice regarding use tax. However, because the Amazon Law is not (yet) in effect, the key point for Internet retailers is that, in Vermont, the physical-presence rule continues to apply.
Because the issue of sales tax on Internet purchases has been contentious in Vermont and elsewhere, you should consider checking in periodically with the Vermont Department of Taxes 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.