If you are selling goods or products over the Internet to customers located in Rhode Island, you should learn about Rhode Island’s Internet sales tax rules. These rules have been a matter of debate in Rhode Island, as well as in other states and at the federal level. Rhode Island 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, a 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. However, Rhode Island has special rules that apply to certain larger Internet retailers that make them subject to sales tax laws even without a physical presence in the state (see Rhode Island’s Amazon law, below).
Examples of Physical Presence
Example 1: You are an online retailer located in Lincoln, Nebraska and make a sale through your website to a customer in Woonsocket, Rhode Island—a state where your business has no physical presence: You are not required to collect sales tax from the Woonsocket customer (unless you fall under Rhode Island’s Amazon laws).
Example 2: You are an online retailer operating solely out of an office in Cranston, Rhode Island and make a sale through your website to a customer in Pawtucket, Rhode Island: You are required to collect sales tax from the Pawtucket customer.
Example 3: After several years of operating solely out of a warehouse in Lincoln, Nebraska, you open a one-room satellite office just outside of Providence, Rhode Island—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Warwick, Rhode Island: You are required to collect sales tax from the Warwick customer.
In 2009, Rhode Island amended the definition of retailer in R.I. Gen. Laws 44-18-15. The change has the effect of requiring certain larger Internet retailers with no physical presence in Rhode Island to collect and pay Rhode Island’s sales tax. More specifically, an out-of-state retailer needs to collect sales tax from Rhode Island 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.
In 2009, in advance of Rhode Island’s passage of the law, Amazon.com shut down all click-through arrangements with Rhode Island residents. As Amazon’s Associates Program Operating Agreement shows, Rhode Island residents continue to be ineligible for this program.
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 Rhode Island, 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.
For initial guidance on how physical presence is defined under Rhode Island law, see Section 44-18-23 of the Rhode Island General Laws (R.I. Gen. Laws). The section defines “engaging in business in this state” to include having places of business in the state maintained directly or indirectly or through a subsidiary, representative, or agent, as well as certain forms of “regular or systematic solicitation of sales.” Similar guidance is contained in the definition of “engaging in business in this state” in Rule 5 of Rhode Island Regulation SU 11-20.
Some items sold via the Internet to Rhode Island customers may be exempt from sales tax under Rhode Island law. For example, most articles of clothing and footwear are exempt from sales tax. For a complete description of all tax-exempt items, review all sections of R.I. Gen. Laws 44-18-30.
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 as a use tax. The Rhode Island Division of Taxation (DOT) publishes a short, easy-to-read guideon the state’s use tax. It states that use tax may be due on: “A mail order or internet purchase could have been shipped directly to” the purchaser. For more detailed information, check R.I Gen. Laws 44-18-20.
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 with regard to collecting sales tax in Rhode Island. However, because Internet sales tax is a subject of ongoing debate, you should check in periodically with the Rhode Island Division of Taxation to see if the rules have changed.
Updated: April 14, 2016