THE FINE PRINT — Do I need to collect sales tax if I sell stuff on the internet?

December 1, 2014

By Jan Pierce

janpierceSales tax is imposed on the sale of tangible personal property sold within the state. (Tangible personal property means stuff that you can touch but isn’t real estate.) If it is due, it is due only once. That’s why merchants get a seller’s permit or sales tax number. It allows them to buy merchandise at the wholesale level they intend to resell. The sales tax is imposed on the customer who purchases the merchandise.

Computers and the internet have made sales tax more complicated. In the good old days, a merchant or manufacturer would buy some stuff and resell it to someone down the road. Now stuff gets sold all over the country and lots of money is tied up in stuff that is not tangible. This means that states are missing out on the opportunity to tax lots of stuff — products that were not tangible and/or not sold by a merchant located within its borders. In response, states have revised their tax laws to include many digital goods and have clamped down on out-of-state retailers selling within their borders.

Sales tax levied on digital products, or on certain services, is more complicated. It often looks like a patchwork of exceptions. If you sell these types of products or services, whether locally or on the internet, you should research the question further. In the case of digital products, it usually revolves around whether the item purchased is a finished product. With respect to services, it depends on whether the merchant installs tangible personal property as part of their service, for example, in a real-property construction activity versus an over-the-counter product.

Regardless of whether you sell a product in a brick-and-mortar store or on the internet, there is no question that you have to collect sales taxable merchandise sold or taxable services performed within your own state. Whether or not you have to collect sales tax for products sold in a different state depends on whether you have a physical presence in that state. This is what’s referred to as “nexus.” It can be a retail store or a warehouse. An out-of-state delivery made in the merchant’s own vehicle also establishes nexus, but merchandise delivered by common carrier does not.

A 1992 Supreme Court case relating to mail order companies ruled that such companies do not have to collect sales tax for states that they sell in unless they have nexus in that state. This same case has been applied to internet sales. The reason that Amazon is now collecting sales tax more than it once did is because it now has nexus in 23 states. At the present time, local DIY artisans, and others who sell on Etsy or Ebay, are not required to collect sales tax for other states.

Send your question to jan@janpiercelaw.com. To protect your privacy, your name will not be published.

Jan Pierce, S.C. is a law firm In Milwaukee that was founded with the belief that people can make a positive difference in the world and make a profit. The firm’s emphasis is on assisting small businesses and social entrepreneurs in all aspects of launching and managing their ventures. Disclaimer: Advice in this column is general legal information and does not constitute, nor is it intended to be, legal advice.

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