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. 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 Wisconsin. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
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 Wisconsin, as well as quite a few other states, that is 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 Wisconsin, 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 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 “retailer engaged in business in this state.” The definitions include:
- maintaining, occupying, or using a place of business directly or indirectly,or through a subsidiary, or agent
- any person who has an “affiliate” in the state, which, in general terms, means there is a significant overlap of ownership or control between the person and the business, in terms of stock ownership or otherwise
- a broad statement covering any retailer selling taxable items “unless otherwise limited by federal law.”
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 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 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.
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 Tacoma, Washington and make a sale 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 operating solely out of an office in Kenosha, Wisconsin and make a sale 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 to a customer in Green Bay, Washington: You are required to collect sales tax from the Green Bay customer.
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 relatively brief 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.
While you might not know it from looking solely at Wisconsin’s sales tax laws, 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 Wisconsin has not enacted any law that would require out-of-state retailers to collect sales tax from Washington customers.
In Wisconsin, 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 Wisconsin Department of 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.