If you are selling goods or products online and some of your customers are located in Wisconsin, 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 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.
Examples of Physical Presence
Example 1: You are an online retailer located in Tacoma, Washington and make a sale through your website to a customer in Appleton, Wisconsin—a state where your business has no physical presence: You are not required to collect sales tax from the Appleton customer.
Example 2: You are an online retailer located in Kenosha, Wisconsin and make a sale through your website to a customer in Racine, Wisconsin: You are required to collect sales tax from the Racine customer.
Example 3: After several years of operating solely out of a warehouse in Tacoma, Washington, you open a one-room satellite office just outside of Milwaukee, Wisconsin—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Green Bay, Washington: You are required to collect sales tax from the Green Bay customer.
Physical Presence and Nexus in Wisconsin
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 Wisconsin, 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 initial guidance on how physical presence is defined specifically under Wisconsin law, consult Section 77.51(13g) of the Wisconsin Statutes (WS), which provides definitions for a “retailer engaged in business in this state.” The definitions include:
For further guidance on both physical presence and nexus, review Section 11.97 of Chapter Tax 11 (“Tax 11.97”) of the Wisconsin Administrative Code, which goes into more detail regarding United States Supreme Court cases, Wisconsin statutes, and activities which do—and do not—create nexus under Wisconsin law.
Apart from the statutes and administrative rules, the Wisconsin Department of Revenue (DOR) has an extensive, plain-English publication, Wisconsin Sales and Use Tax Information, that covers most of the important details of Wisconsin sales and use tax. Section IV.A of the publication covers out-of-state retailers, and largely restates the points in the statute and administrative rules. The DOR publication uses neither the term physical presence nor nexus in its explanations.
Finally, it is worth noting that a Wisconsin Department of Revenue (DOR) webpage on sales and use tax questions states that “If out-of-state retailers have physical presence (nexus) in Wisconsin, they may be required to register and collect the Wisconsin tax,” which seems to equate nexus with physical presence.
Under Wisconsin law, some items may be exempt from sales tax, and certain purchasers may not be required to pay sales tax. For example, most food and food ingredients are exempt from sales tax. For relatively complete information on exemptions, consult Section 11 of “Wisconsin Sales and Use Tax Information” (“What is exempt?”) and sections Tax 11.08 through Tax 11.20 in Chapter Tax 11 of the Wisconsin Administrative Code. The DOR also publishes a relativelybrief webpage on exemptions which mainly covers exempt purchasers rather than exempt items.
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 DOR publishes a helpful FAQ page on the use tax. Among other things, the page states that when a person makes a purchase from an Internet seller and the seller charges no tax, then the purchaser must pay use tax.
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 with regard to Internet sales to customers in Michigan. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the Wisconsin Department of Revenue to see if the rules have changed.
Updated: April 14, 2016