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. 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 Virginia. 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 Virginia, 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 Virginia, have used the term “nexus” rather than “physical presence” in their sales tax laws, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
For basic guidance on how physical presence is defined specifically 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 “own[ed] or control[led]” by the same “interests” (persons, entities, etc.) 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.
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 the DOT’s FAQ page, “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).
Example 1: You are operating solely out of a warehouse in Burlington, Vermont and make a sale 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.
Example 2: You are operating solely out of an office in Arlington, Virginia and make a sale 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 to a customer in Norfolk, Virginia: You are required to collect sales tax from the Norfolk customer.
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; it covers certain school supplies costing $20 or less per item, and certain clothing and footwear costing less than $100 per item. For additional information, check the DOT’s August sales tax holiday webpage.
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’s FAQ page on sales and use tax refers to the use tax as “the ‘other half’ of the Virginia retail sales and use tax requirements,” and states that “purchases from the Internet” is one common area where use tax is incurred. For more information, review the FAQ page.
While you might not know it from looking solely at Virginia’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 Virginia has not enacted any law that would require out-of-state retailers to collect sales tax from Virginia customers.
In Viriginia, 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 Virginia Department of Taxation 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.