If you are selling goods or products online and some of your customers are located in Maine, 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 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 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 Honolulu, Hawaii and make a sale through your website to a customer in Augusta, Maine—a state where your business has no physical presence: You are not required to collect sales tax from the Augusta customer.
Example 2: You are an online retailer located in South Portland, Maine and make a sale through your website to a customer in Lewiston, Maine: You are required to collect sales tax from the Lewiston customer.
Example 3: After several years of operating solely out of a warehouse in Honolulu, Hawaii, you open a one-room satellite office just outside of Portland, Maine—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Bangor, Maine: You are required to collect sales tax from the Bangor customer.
While the physical presence rule may seem clear, this is not necessarily the case. InQuill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states 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.
In line with Quill, the Maine Revenue Service largely tends to equate physical presence and nexus. More particularly, in a discussion of catalog and Internet sales at page 83 of its Reference Guide, the MRS states that “A retailer that solicits sales through a catalog or Internet web site must collect tax on sales made to customers in Maine if the retailer has ‘nexus’ (connection) in Maine.” And Section 1754-B(1)(G) of the sales tax statute itself states that a seller must have “a substantial physical presence in this State sufficient to satisfy the requirements of the due process and commerce clauses of the United States Constitution,” and goes on to state that “Solicitation of business in this State through catalogs, flyers, telephone or electronic media,” when goods are delivered by a “common carrier” (i.e., U.S. mail, UPS, Fedex, or the like), does not constitute substantial physical presence.
Maine law references having a substantial physical presence. For guidance on how substantial physical presence is determined, you can consult Section 1754-B of Title 36 of the Maine Revised Statutes, covering registration of sellers for sales tax purposes with the State of Maine.
Additional, and likely more readable, guidance is available from the Reference Guide on the state’s sales and use tax law published by the Sales, Fuel & Special Tax Division of the Maine Revenue Service (MRS). The Guide is updated every few years, most recently in 2014. Starting at page 113, the Guide covers in detail multiple categories of sellers required to register for a tax certificate and collect sales tax. As the Guide states at one point, “Having any type of physical presence or nexus in this State, such as operating or maintaining a store, warehouse, office or repair facility, requires registration.” In addition, a FAQ answer from the MRS states that “Sales made over the Internet are subject to the same sales tax application [i.e., rules] as mail order sales”—a statement that accurately tracks with the decision inQuill.
Some items sold via the Internet to Maine customers may be exempt from sales tax under Maine law. For example,Section 1760-5(A) of the Maine sales and use tax statute states that hearing aids and eyeglasses are exempt from sales tax. For further information on exemptions, check generally the various parts of Section 1760 of the sales tax statute, or, as a more readable alternative, the section on Exempt Goods starting at page 65 of the MRS Reference Guide on the sales and use tax.
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. This responsibility is codified in Maine law starting atSection 1861 of the state’s sales and use tax statute. The MRS also publishes a short, readable guide on the use tax. As the guide states, a common sort of transaction subject to use tax is purchasing goods from an out-of-state vendor “by mail order or by taking delivery” out-of-state but then bringing the goods to Maine for use there. Keeping the Quilldecision in mind (see above), it seems clear that purchases from out-of-state Internet sellers without a physical presence in Maine would also be subject to use tax.
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.
Unlike some other states that have passed so-called Amazon laws, Maine has not enacted any law that would require out-of-state retailers to collect sales tax from Maine customers. Instead the physical presence rule applies for Internet retailers selling to customers in Maine. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Maine Revenue Service to see if the rules have changed.
Updated: April 14, 2016