If you are selling goods or products online and some of your customers are located in South Carolina, 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.
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, for purposes of collecting sales tax, 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 Little Rock, Arkansas and make a sale through your website to a customer in Greenville, South Carolina—a state where your business has no physical presence: You are not required to collect sales tax from the Greenville customer.
Example 2: You are an online retailer operating solely out of an office in Mount Pleasant, South Carolina and make a sale through your website to a customer in Rock Hill, South Carolina: You are required to collect sales tax from the Rock Hill customer.
Example 3: After several years of operating solely out of a warehouse in Little Rock, Arkansas, you open a one-room satellite office just outside of Columbia, South Carolina—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Charleston, South Carolina: You are required to collect sales tax from the Charleston customer.
While the physical presence rule may seem clear, that is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connection) between a business and a state. Many states, including South Carolina, have used the term nexus rather than physical presence in their sales tax laws and other official documents, and have sometimes defined nexus in ways that could go beyond physical presence.
South Carolina Revenue Ruling #14-4, issued in 2014 by the state’s Department of Revenue (DOR), states the Department’s "official position regarding sales and use tax nexus at this time.” It warns that this is an area subject to change due to a new statute, regulation, court decision, or advisory opinion. Most of the Ruling consists of a series of Yes-or-No questions. While the Ruling is difficult to summarize, key questions and answers on mail order and catalog businesses suggest that no sales tax needs to be collected assuming that the retailer has "no physical presence in South Carolina and that the catalogs are not mailed from within South Carolina.” One question and answer indicates that a business that “sells tangible personal property over the Internet and operates a website which is maintained on a server that is owned by the business and located in South Carolina” must collect and pay sales tax. There may also be other, similarly attenuated connections to the state that the DOR considers sufficient for nexus and the requirement to collect and pay sales tax.
The South Carolina Sales and Use Tax Manual (2015 Edition) states that an out-of-state retailer must obtain a retail license and remit South Carolina sales tax or use tax on retail sales shipped into South Carolina if the out-of-state retailer has a physical presence in South Carolina. (See Chapter 3.) It goes on to provide examples of physical presence which largely match the items in the physical presence list above. Chapter 23 of the Manual covers Frequently Asked Questions. In several cases, answers to questions indicate that a business without a physical presence in South Carolina is not required to obtain a retail license—and is not liable for sales tax.
For additional guidance on how physical presence is determined under South Carolina law, see Section 12-36-80 of the South Carolina Code of Laws (S.C. Code) which defines a retailer maintaining a place of business in the state to include maintaining a place of business directly or by a subsidiary. Another section of the sales tax statute (S.C. Code 12-36-1340) adds that a retailer who distributes catalogs or other advertising materials that lead to orders from South Carolina residents must collect and pay sales tax. (South Carolina’s full sales tax statute, S.C. Code 12-36, is available online.)
In limited cases, items sold via the Internet to South Carolina customers may be exempt from sales tax under South Carolina law. For example, textbooks and various other publications, when used in primary or secondary schools, or institutions of higher learning, are exempt from sales tax. The DOR publishes a readable list of most exemptions, including annotations to relevant statutes and DOR rulings and regulations, as Chapter 9 of its Sales and Use Tax Manual. Chapters 14 through 21 of the same Manual discuss additional exemptions, generally based on the status of the purchaser rather than on the type of item sold. You can review the exempt-items statute at S.C. Code 12-36-2120, in its entirety.
South Carolina also has an annual sales tax holiday running from the first Friday in August through to the following Sunday. The tax holiday covers a variety of items, including clothing, clothing accessories, footwear, school supplies, computers, printers, software, blankets, bed linens, sheet sets, and bath towels, among other items. For additional information, do an Internet search for South Carolina Sales Tax Holiday. Each year the DOR’s updates its online information and includes links to official documents, such Revenue Rulings, that provided details for the current year.
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 DOR publishes a short webpage and a more extensive FAQ page on the use tax. Both pages indicate that goods bought online are subject to the use tax.
For more detailed information, see Chapter 3 of the DOR’s Sales and Use Tax Manual (which mentions, among many other things, that use tax applies to purchases over the Internet from out-of-state retailers).
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.
The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in many states and at the federal level. However, at this time South Carolina has not enacted any law that would require out-of-state retailers with no physical presence in the state to collect sales tax from South Carolina customers. However, because the issue has been contentious in many places around the country, you should consider checking in periodically with the South Carolina Department of Revenue to see if the rules have changed.
Updated: April 14, 2016