Sales and Use Tax Rates and Rules for Online Shoppers
Wolters Kluwer Provides Key Details for Website, E-Commerce Transactions
(NEW YORK, NY, January 2018) — Whether you’re checking out at a big box store, shopping small or making a purchase through a mobile app, sales and use taxes apply. Cash register sales tax calculations are clear on your receipt when it comes to state and local sales taxes, but questions remain over tracking sales and use taxes on the ever-shifting Internet retail landscape of buying from favorite apps and web sites.
“It’s really rather straightforward,” said Carol Kokinis-Graves, JD and Senior State Tax Analyst for Wolters Kluwer Tax & Accounting. “Online shoppers should keep this rule in mind: If the seller charged sales tax on an online purchase, the consumer does not need to do anything further; if the seller did not charge sales or use tax, the consumer is responsible for payment of use tax, and many states allow for payment of the use tax on their annual income tax returns.”
State Sales Tax Breakdown
Overall, 45 states and the District of Columbia currently have a sales tax. Sales tax is generally imposed on retailers who collect it from consumers when they make an in-state purchase of an item, or in some instances a service. Use tax applies when a consumer makes a purchase from an out-of-state retailer for use in their resident state. Generally, if the out-of-state retailer does not collect the use tax, the consumer still owes it to the state department of revenue.
Reporting Use Tax on 2017 State Income Tax Returns
While many taxpayers may still not know they are required to pay the tax if it’s not collected by a retailer, 28 states include instructions with their state tax returns for people to report any uncollected use tax and allow them to pay uncollected tax when filing their state income tax returns.
State returns providing use tax collection instructions:
|California||Kentucky||New Jersey||South Carolina|
“Most states have enacted legislation requiring remote sellers to collect tax from consumers,” said Kokinis-Graves.
Most States Enacting “Amazon” Laws
Collectively, state-initiated remote seller collection laws require online retailers (such as Amazon.com) to collect state use tax in circumstances in which the remote seller has some type of connection with the state, albeit not a physical presence.
New York enacted its click-through nexus law in 2008. Amazon.com and Overstock.com challenged the statute, but the New York Court of Appeals held that online retailers who sold their products solely through the Internet failed to demonstrate that the statutory provision that required out-of-state Internet retailers with no physical presence in New York State to collect sales and use taxes was unconstitutional – under either the Commerce Clause or the Due Process Clause. Ultimately, the U.S. Supreme Court in December 2013 denied the requests of Amazon.com and Overstock.com to review that ruling.
Once the states began to enact their own laws to address the taxation of remote sales, the final arbiter on the issue would have to be either the U.S. Supreme Court or Congress. The refusal of the U.S. Supreme Court to review the New York cases involving Amazon.com and Overstock.com has paved the way for Congress to act. Failing that, states will likely continue to enact such “Amazon” laws or go on losing revenue from uncollected taxes.
According to Kokinis-Graves, the broader nexus provisions already enacted by a number of states generally fall into two categories:
- Click-through nexus provisions generally require online retailers to collect and remit use tax if they enter into an agreement under which an in-state person, for a commission, refers potential purchasers to the retailer, whether through an Internet-based link or a website, provided certain total cumulative sales thresholds are met; and
- Affiliate-nexus provisions generally require online retailers to collect use tax if they have an affiliation with a company doing business in the state.
In addition, beginning in 2018, Massachusetts requires an Internet vendor to collect and remit tax if the vendor used certain software apps and browser “cookies” stored on devices of Massachusetts customers, when the software or data enables the vendor to use those devices. The Commissioner of the Connecticut Department of Revenue Services has indicated Connecticut will follow suit.
States that have enacted one or more of these nexus provisions include: Alabama, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin and Wyoming.
“Over the 2017 Thanksgiving holiday, including Black Friday and Cyber Monday, online retail sales climbed to almost $3 billion,” Kokinis-Graves added. “States will use everything in their arsenal to enforce and collect the tax that is due.”
Proposed Federal Legislation
Although buyers are required to report and pay taxes on their Internet purchases, federal legislation designed to simplify the patchwork of state rules requiring online retailers to collect taxes has fallen short from being signed into law. Whether the Marketplace Fairness Act of 2015, the Online Simplification Act of 2016, or the Remote Transactions Parity Act, Congress has yet to settle the issue.
Quill Physical Presence Standard
Under existing law, retailers nationwide are required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. But they are not required to collect the tax in states where they have no physical nexus based on a 1992 U.S. Supreme Court decision ( Quill Corp. vs. North Dakota). However, the Supreme Court also noted that Congress did have the authority to change this policy and enact legislation requiring all retailers to collect sales tax.
More than two decades and many proposals later, Congress is still working on a solution.
U.S. Supreme Court to Review Quill Physical Presence Standard
The U.S. Supreme Court will review a decision of the South Dakota Supreme Court that struck down a law that enacted economic nexus. That law requires out-of-state retailers with no physical location in South Dakota to collect and remit sales tax on Internet purchases as if the seller had physical presence in the state, if, in the previous calendar year or current calendar year, they had or have:
- Annual gross revenue of more than $100,000 from sales in South Dakota; or
- Made 200 or more sales annually into the state.
The legislation that enacted this provision also provided for an automatic injunction if the law was challenged in court. Wayfair Inc., Overstock.com and Newegg Inc. challenged the statute, the South Dakota Supreme Court found the law unconstitutional under Quill, and the state appealed to the U.S. Supreme Court.