If you are selling goods or products online and some of your customers are located in Maryland, 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 Las Vegas, Nevada and make a sale through your website to a customer in Glen Burnie, Maryland—a state where your business has no physical presence: You are not required to collect sales tax from the Glen Burnie customer.
Example 2: You are an online retailer located in Germantown, Maryland and make a sale through your website to a customer in Columbia, Maryland: You are required to collect sales tax from the Columbia customer.
Example 3: After several years of operating solely out of a warehouse in Las Vegas, Nevada, you open a one-room satellite office just outside of Baltimore, Maryland—a state where previously you had no physical presence. A day later, you make a sale to a customer in Silver Spring, Maryland: You are required to collect sales tax from the Silver Spring 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.
Although Maryland’s sales and use tax statute itself does not use the term nexus, the Comptroller of Maryland uses the term in providing guidance to out-of-state vendors regarding collection of sales tax. More particularly, the Office of the Comptroller takes pains to be clear that presence need not be substantial, but rather, only something more than a slightest presence. The legal implications of this guidance are not clear.
For further guidance on how physical presence is determined specifically under Maryland law, consult of Section 11-701(b)(2) of the Tax – General section of the Maryland Code, which defines the phrase “Engage in the business of an out-of-state vendor.” Section 03.06.01.33 of the Code of Maryland Regulations (COMAR) contains essentially the same information.
Some items sold via the Internet to Maryland customers may be exempt from sales tax under Maryland law. For example, Section 11-205 of sales tax law states that Maryland State flags, United States flags, and certain other flags are exempt from sales tax. For further information on exemptions, check Sections 11-201 through 11-231 of the Tax-General section of the Maryland Code (accessible through the LexisNexis web portal.)
Maryland also has an annual tax-free week for certain clothing and footwear purchases starting on the second Sunday in August. For more information, see COMAR Section 03.06.01.37.
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 Comptroller of Maryland provides guidance on the use tax which specifically mentions purchases made “in person, over the phone, or on the Internet.”
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.
At this time Maryland has not enacted any law that would require out-of-state retailers to collect sales tax from Maryland customers. Thus, in Maryland, the physical presence rule would apply for Internet retailers. However, because the issue is hotly debated in various quarters, you should consider checking in periodically with the Comptroller of Maryland to see if the rules have changed.
Updated: April 14, 2016