If you are selling goods or products online and have customers located in North Carolina, you should take time to learn about North Carolina’s Internet sales tax rules. North Carolina 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 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 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 an online retailer located in Sioux Falls, South Dakota and make a sale through your website to a customer in Winston-Salem, North Carolina—a state where your business has no physical presence: You are not required to collect sales tax from the Winston-Salem customer (unless you fall under North Carolina's Amazon law).
Example 2: You are an online retailer located in Greensboro, North Carolina and make a sale through your website to a customer in Raleigh, North Carolina: You are required to collect sales tax from the Raleigh customer.
Example 3: After several years of operating solely out of a warehouse in Sioux Falls, South Dakota, you open a one-room satellite office just outside of Charlotte, North Carolina—a state where previously you had no physical presence. A day later, you make a sale to a customer in Durham, North Carolina: You are required to collect sales tax from the Durham customer.
North Carolina passed legislation in 2009 amending the definition of retailer in its state tax statutes and updating its rules regarding remote sales. These changes had the effect of requiring certain larger Internet retailers with no physical presence in North Carolina to collect and pay North Carolina’s sales tax. More specifically, an out-of-state retailer must collect sales tax from North Carolina customers if that retailer:
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.
The North Carolina DOR has published a bulletin that covers the main changes under the 2009 law. The bulletin has brief but useful sections on the change in the definition of retailer and on the new law on click-through arrangements.
It is worth noting that North Carolina law states that: “A nonresident retailer who purchases advertising to be delivered by television, by radio, in print, on the Internet, or by any other medium is not considered to be engaged in business in this State [i.e., is not required to collect and pay sales tax] based solely on the purchase of the advertising,” thereby distinguishing Amazon-style click-through arrangements from some other types of Internet-based presence in North Carolina.
Many states, including North Carolina, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, in ways that may go beyond physical presence. For more guidance on the issue, you can refer to North Carolina General Statutes which define the term “engaged in business.” The definition includes the physical presence items listed above (including places of business in the state controlled directly or indirectly), and retailers that make a remote sale if certain conditions are met. These remote sales with certain conditions are part of North Carolina's Amazon law.
Some items sold via the Internet to North Carolina customers may be exempt from sales tax under North Carolina law. For example, computer software “designed to run on an enterprise server operating system” is exempt from sales tax. For a complete description of all tax-exempt items and transactions, review all sections of N.C. Gen. Stat. 105-164.13. North Carolina formerly had an annual sales tax holiday in August. However, the holiday was repealed in 2014.
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 has a webpage providing basic guidance on the use tax, as well as a FAQ page on the use tax. The DOR’s basic guidance states that “Out-of-state retailers that are not ‘engaged in business’ in this State are not required to collect North Carolina sales and use tax,” and that such retailers include out-of-state businesses selling over the Internet. Similarly, the FAQ page mentions that items purchased on the Internet may be subject to use tax.
For additional information, you can check the use tax statute, N.C. Gen. Stat. 105-164.6.
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 version, 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 with regard to collecting tax on sales to customers in North Carolina. However, the issue is contentious and evolving as demonstrated by the Amazon law enacted in North Carolina in 2009. Because Internet sales tax is a subject of ongoing debate, you should consider checking in periodically with the North Carolina Department of Revenue to see if the rules have changed.
Updated: April 14, 2016