If you are selling goods or products online and some of your customers are located in Indiana, 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 within individual states and at the federal level. Indiana has a special, unique agreement that requires Amazon.com specifically to collect sales tax from customers.
Along with the more common term sales tax, Indiana law uses the term gross retail tax. However, it is clear from dozens of references to sales tax throughout Title 45, Article 2.2 of Indiana’s Administrative Code (the part of the Code that officially interprets Indiana’s gross retail tax law) that the two terms are synonymous. Sales tax and gross retail tax are used interchangeably in this article.
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:
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 operating solely out of a warehouse in Phoenix, Arizona and make a sale to a customer in South Bend, Indiana—a state where your business has no physical presence: You are not required to collect sales tax from the South Bend customer.
Example 2: You are operating solely out of a store in Fort Wayne, Indiana and make a sale to a customer in Gary, Indiana: You are required to collect sales tax from the Gary customer.
Example 3: After several years of operating solely out of a warehouse in Phoenix, Arizona, you open a one-room satellite office just outside of Indianapolis, Indiana—a state where previously you had no physical presence. A day later, you make a sale to a customer in Evansville, Indiana: You are required to collect sales tax from the Evansville customer.
While the physical presence rule may seem clear, 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. Many states, including Indiana, have used the term nexus rather than physical presence in their sales tax laws or other official documents.
Guidance on how physical presence is determined specifically under Indiana law is available in Section 2.2-3-3 of Title 45 of the Indiana Administrative Code (IAC), which defines “Retail merchant engaged in business in Indiana.” A general index to all sections Title 45 is available online.
The Indiana Department of Revenue (DOR) has a webpage regarding the Department’s voluntary disclosure program for out-of-state retailers. The webpage refers to “brick-and-mortar nexus with Indiana, such as an Indiana office, warehouse, plant or residence,” and otherwise seems to equate nexus with physical presence. In addition, a2009 ruling considered a company that sold products “via mail-order, internet, telephone, or facsimile” and delivered “all products via mail or common carrier” but did not have any physical locations, employees, agents, or representatives in Indiana. The DOR, citing Quill and other decisions, concluded that the company lacked “‘substantial nexus’ sufficient” for it to be required to collect sales tax.
In 2012, Indiana reached an agreement with Amazon.com to have Amazon pay Indiana sales tax starting in 2014. This was just one action in a much larger, national debate about whether Internet retailers with no physical presence in many states should nonetheless be required to pay sales tax in those states. In this regard, Indiana’s special agreement with Amazon is unusual. Instead of individual agreements with particular companies, most states concerned with this issue have passed—or tried to pass—what is commonly called an Amazon law; in other words, special tax legislation that targets larger Internet retailers such as Amazon.com and Overstock.com.
A limited number of items sold via the Internet to Indiana customers may be exempt from sales tax under Indiana law. For example, under Section 2.5-5-20 of the Indiana sales tax statute, food ingredients for human consumption are exempt from sales tax. For further information on many exemptions, consult Indiana Code 6-2.5-5.
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 (or gross retail tax) but, rather, a use tax. For additional information, see this FAQ page on the Indiana Department of Revenue’s website, which covers both sales tax and use tax. (Note that for the question “What type of purchases might cause me to become liable for use tax?” one answer is “Internet purchases from out-of-state vendors.”)
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 in Illinois. However, because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the Indiana Department of Revenue to see if the rules have changed.
Updated: April 27, 2016