If you are selling goods or products online and some of your customers are located in the District of Columbia, 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 the District of Columbia. 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 Washington D.C., as well as quite a few states, 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 Washington D.C., 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 in D.C., consult Section 47-2201(h) of the D.C. Official Code, which defines the term “Engaging in business in the District.” (The D.C. Official Code is available online through a web portal maintained by a private company, Westlaw; it is not possible to provide direct links to individual sections of the Code in this website.) The definition includes maintaining a place of business directly or indirectly, or through a subsidiary or agent.
For additional information specifically on sales tax “nexus” in D.C., there is a guidance document published by the D.C. Office of Tax and Revenue (OTR) which briefly discusses various types of nexus in relation to various taxes; the relevant section of the document, addressing sales tax nexus factors for “vendors,” essentially repeats the D.C. Official Code.
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 Carson City, Nevada and make a sale to a customer in Washington, D.C.—D.C. being a place where your business has no physical presence: You are not required to collect sales tax from the D.C. customer.
Example 2: You are operating solely out of an office in the Adams Morgan neighborhood of Washington, D.C. and make a sale to a customer who is also in D.C.: You are required to collect sales tax from the D.C. customer.
Example 3: After several years of operating solely out of a warehouse in Carson City, Nevada, you open a one-room satellite office near Dupont Circle in Washington D.C.—and you previously had no physical presence in D.C. A day later, you make a sale to a customer in the Georgetown neighborhood of D.C.: You are required to collect sales tax from the Georgetown customer.
Under Washington, D.C. law, some items may be exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, most types of food for home consumption (foods defined as “eligible foods” are exempt from sales tax. For additional information on exemptions, consult generally the various paragraphs under Section 47-2001(n)(2) of the D.C. Official Code, as well as Section 47-2005 of the Code.
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.” (An OTR FAQ page confirms that this is how the use tax works.) The complete D.C. use tax laws are codified as D.C. Code Sections 47-2201 through 47-2212.
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 Washington, D.C. has no law that would require out-of-state retailers to collect sales tax from D.C. customers.
In Washington, D.C., the physical-presence rule applies for Internet retailers. However, because the issue has been contentious, you should consider checking in periodically with the Washington, D.C. Office of Tax and Revenue 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.