If you use the Internet to sell goods or products to customers in Vermont, you should learn about Vermont’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. Vermont is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.
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, 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. However, Vermont has special rules that apply to certain larger Internet sellers that make them subject to sales tax laws even without a physical presence in the state (see Vermont’s Amazon law, below).
Examples of Physical Presence
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 (with the exception of sellers who fall under Vermont’s Amazon law).
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.
Vermont’s Amazon Law
The role of physical presence—or nexus—under Vermont law has become more complicated since at least 2011. In that year, the Vermont legislature took actions that would move the state toward requiring certain Internet vendors to collect state sales tax. However, because of the unusual nature of the Vermont legislation, the most important elements of the new law went into effect only in October 2015.
Under the new law, larger Internet vendors with no physical presence in the state are required to collect and pay Vermont’s sales tax under certain conditions. More specifically, an out-of-state vendor must collect sales tax from Vermont customers if that vendor:
Similar laws have been enacted in other states; they are commonly referred to 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 where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws are enacted to try to reduce this loss.
In 2015, in advance of Vermont’s enactment of the law, Amazon.com shut down all click-through arrangements with Vermont residents. As Amazon’s Associates Program Operating Agreement shows, Vermont residents continue to be ineligible for the program.
Note: Vermont also has a law that requires an out-of-state person “who engages in regular, systematic, or seasonal solicitation of sales of tangible personal property in this state,” and has sales of at least $50,000 in any 12-month period, to collect sales tax. It is not clear that this law is consistent with the U.S. Supreme Court’s holding in Quill. The law is codified at 32 V.S.A. Sec. 9701(F).
Physical Presence and Nexus in Vermont
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 Vermont, 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 basic guidance on how physical presence is defined under Vermont law, consult Section 9701(9) of Title 32 of the Vermont Statutes (32 V.S.A. § 9701), which provides various definitions of a vendor, (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. 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.
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 two brief webpages that discuss use tax. One of the webpages states that use tax is due when an out-of-state seller is not registered to collect tax in Vermont, and this “typically is a seller in a state that does not charge sales tax or a company that sells its merchandise over the internet.”
Proposed Federal Legislation
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.
For most small online businesses, it is the long-established physical presence rule that will apply. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Vermont Department of Taxes to see if the rules have changed.
Last updated: April 13, 2016