If you are selling goods or products online and some of your customers are located in Nevada, 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. Nevada is one of a number of states that has enacted special legislation (known as Amazon laws) that effectively forces larger, out-of-state Internet retailers to collect and pay sales tax.

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:

• a warehouse in the state
• a store in the state
• an office in the state, or
• a sales representative in the state.

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. However, Nevada has special rules, discussed below, that apply to certain Internet sellers without a physical presence in the state.

Examples of Physical Presence

Example 1: You are an online retailer located in Baltimore, Maryland and make a sale through your website to a customer in Sunrise Manor, Nevada—a state where your business has no physical presence: You are not required to collect sales tax from the Sunrise Manor customer. (There is an exception to this example if you are a large seller with substantial sales in Nevada; see below.)

Example 2: You are an online retailer located in Reno, Nevada and make a sale through your website to a customer in Paradise, Nevada: You  are  required to collect sales tax from the Paradise customer.

Example 3: After several years of operating solely out of a warehouse in Baltimore, Maryland, you open a one-room satellite office just outside of Las Vegas, Nevada—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Henderson, Nevada: You  are  required to collect sales tax from the Henderson customer.

Nevada’s Amazon Law

In 2015, Nevada’s sales tax statute was amended with new rules for out-of-state retailers. The law has the effect of requiring certain larger Internet retailers with no physical presence in the state to collect and pay Nevada’s sales tax. Specifically, an out-of-state retailer must collect sales tax from Nevada customers if that retailer:

• has an agreement with a business or seller located in Nevada to pay for customer referrals obtained via a link on the Nevada seller’s website (a click-through arrangement), and
• the out-of-state retailer’s gross receipts from these directed sales to Nevada customers exceeds $10,000 during the preceding four calendar quarter.

Similar laws have been enacted in other states; they are commonly referred to as Amazon laws. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws have been enacted to try to reduce this loss. (Nevada reached a special agreement with Amazon in 2011, which predated the 2015 law.)

Another part of the Nevada's 2015 law deals with so-called affiliate nexus. In short, if an out-of-state retailer has a person (component member) in Nevada who works in certain specified ways with the retailer, then the retailer is presumed to be liable for the collection and payment of Nevada sales tax. So if you work with a person in Nevada to help sell, store, or service your products, check the Nevada sales tax statutes for more information.

Physical Presence and Nexus in Nevada

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 Nevada, 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.

To the extent the 2015 law doesn’t apply to a retailer, there is some limited guidance on how physical presence—or nexus—is determined under Nevada law. Section 372.724(1)(b) of the Nevada Revised Statutes states simply and broadly that: “The imposition, collection and remittance of the sales tax apply to every retailer whose activities have a sufficient nexus with this State to satisfy the requirements of the United States Constitution.” As the requirements of the Constitution are interpreted by the Supreme Court, this statement would seem, in effect, to point back to  Quill.

The Nevada Department of Taxation (DOT) publishes an  online FAQ page  covering questions on various state taxes including sales tax. In response to a question on Streamlined Sales Tax, the FAQ page refers to “the U.S. Supreme Court holding that a state may not require a seller that does not have a physical presence in the state to collect tax on sales into the state.” Note that in this statement, the DOT refers to physical presence rather than nexus.

Non-Taxable Items

A limited number of items sold via the Internet to Nevada customers may be exempt from sales tax under Nevada law. For example, seeds and annual plants that ordinarily produce food for human consumption are exempt from sales tax; similarly, food for human consumption, other than prepared food, is exempt from sales tax. For further information, check Sections 372.260 through 372.350 of the Nevada Revised Statutes and  Sections 372.540 through 372.715  of the Nevada Administrative Code.

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. In its overview of the use tax, the DOT  online FAQ pageon use taxes states that, among other things, the use tax applies to Internet purchases. The same FAQ page also provides eight examples where sales tax is not collected and use tax is due, including purchasing items from an Internet site.

For statutory statements about the use tax, see NRS Sections 372.185 through 372.258.

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.

Final Words

For most small online businesses, it is the long established physical presence rule that will apply.  Larger online retailers who fall under Nevada's Amazon law and those with possible in-state affiliated status will need to check the rules more carefully.  Because Internet sales tax is a subject of ongoing debate, you should check in periodically with the  Nevada Department of Taxation  to see if the rules have changed.

Updated: April 14, 2016

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