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. Collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and 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 a1992 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:
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.
Examples of Physical Presence
Example 1: You are on online retailer located in Carson City, Nevada and make a sale through your website 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 an online retailer with an office in the Adams Morgan neighborhood of Washington, D.C. and make a sale through your website 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 through your website to a customer in the Georgetown neighborhood of D.C.: You are required to collect sales tax from the Georgetown customer.
While the physical presence rule may seem clear, in the case of Washington, D.C., as well as quite a few other states, it is necessary to emphasize that 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 Washington, D.C., have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that may go 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 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.
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 47-2005 of the D.C. Official Code.
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 complete D.C. use tax laws are codifiedas D.C. Code Sections 47-2201 through 47-2212.
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 that provides primary guidance on collecting tax on sales to customers in Washington, D.C. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the D.C. Office of Tax and Revenue to see if the rules have changed.
Updated: April 27, 2016