If you are selling goods or products online and some of your customers are located in Virginia, 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. However, Virginia has special rules related to so-called affiliates nexus (see below).
Examples of Physical Presence
Example 1: You are an online retailer located in Burlington, Vermont and make a sale through your website to a customer in Richmond, Virginia—a state where your business has no physical presence: You are not required to collect sales tax from the Richmond customer (unless you have affiliate nexus).
Example 2: You are an online retailer located in Arlington, Virginia and make a sale through your website to a customer in Newport News, Virginia: You are required to collect sales tax from the Newport News customer.
Example 3: After several years of operating solely out of a warehouse in Burlington, Vermont, you open a one-room satellite office just outside of Virginia Beach, Virginia—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Norfolk, Virginia: You are required to collect sales tax from the Norfolk customer.
Virginia passed a law that went into effect in 2013 which modifies the definition of dealer for purposes of the state sales tax. In general, a dealer is someone required to collect and pay the state’s sales tax. Under the new law, a dealer now is presumed to include out-of-state businesses that “belong to a commonly controlled group in which a person or entity maintains a distribution center, warehouse, fulfillment center, office, or similar location in Virginia that facilitates the delivery of tangible personal property sold by the out-of-state dealer.” There are ways to rebut the presumption (prove that the business belonging to a controlled group is not required to collect sales tax).
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 Virginia, 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 Virginia law, consult Section 58.1-612 of the Virginia Code, which explains when a dealer (a term which includes retail businesses) has sufficient activity within Virginia to be required to register to collect sales tax. This includes maintaining a place of business in the state directly or through an agent or subsidiary, as well as out-of-state businesses owned or controlled by the same interests (persons, entities, and so on) that control a business located in Virginia.
Also, the Virginia Department of Taxation (DOT) publishes both a FAQ page and a general webpage on the sales tax. Each of these pages states that an out-of-state dealer must register with Virginia to collect sales tax if the dealer has sufficient nexus with Virginia. While neither page provides specifics regarding what might constitute sufficient nexus, both direct the reader back to Section 58.1-612 of the Virginia Code for further clarification.
The DOT’s FAQ page does state, “If the seller does not have nexus with Virginia, there is no requirement to collect the tax or register for a use tax account.” (Use tax, discussed further below, is a complementary tax to sales tax).
Under Virginia law, a limited number of items may be exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, when used for agricultural purposes, various products are exempt from sales tax. More generally, you can find information on exemptions in Virginia Code Sections 58.1-609.1 through 58.1-609.11; the sections are accessible online from an index page.
Virginia also has an annual August sales tax holiday running from the first Friday in August through to the following Sunday. The holiday covers certain school supplies costing $20 or less per item, certain clothing and footwear costing less than $100 per item, and several other categories. For additional information, check the DOT’s sales tax holidaywebpage.
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’s use tax webpage refers to the use tax as “the ‘other half’ of the Virginia retail Sales and Use Tax Act.” In addition, the DOT’s sales and use tax FAQ page and states that “purchases from the Internet” is one common area where use tax is incurred. For more information, review the webpage and FAQ page.
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 to Internet sales. However, because of Virginia's affiliate nexus law and because Internet sales tax is a subject of ongoing debate, make sure you understand the rules and check in periodically with the Virginia Department of Taxation to see if the laws have changed.
Updated: April 14, 2016