Online Sales Tax Explained

A man shopping on a tablet during Cyber Monday
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Whether it's Black Friday or Cyber Monday, or the day after Christmas, or any day, if you own an online business, you have to deal with sales taxes. Do you know the laws in your state? Some information to consider as you deal with all those sales - and sales taxes. 

Sales Tax for Online Transactions

If you have a business that sells products online, you may or may not have to collect sales tax from customers who order from your website.

In 1992, the Supreme Court, in the Quill decision, determined that a merchant is not required to collect sales tax unless the merchant has a "physical presence" in that state.

More recently, states have been attempting to counter this decision by requiring sales tax to be collected if an "affiliate" or "solicitor" of an online company has a physical presence in that state. Several states, including New York, Rhode Island, and North Carolina, have written legislation requiring sales tax in such circumstances. Other states may be joining the list, but these laws are also being challenged. This situation is constantly changing, so check with your state department of revenue for more information.

Same-state Sales

If the physical location of your business and your customer are in the same state, you must collect sales tax on any purchases made by that person. The sales tax rate is based on the address of the order.

If you have more than one location, and you have a location in the same state as the customer, you must charge sales tax. For example, if you have locations in Ohio and Pennsylvania, and your customer is in Ohio, you must charge sales tax, even if the order is shipped from your Pennsylvania location.

Different State Sales

If you are in a different state from your customer, you do not need to collect sales tax from that person unless you have a physical presence in that state, but check to be sure your state has not enacted legislation, as mentioned above, to require sales taxes if you have an affiliate or solicitor in that state.

The "Amazon Tax Situation" and National Online Sales Taxes

Over the past few years, more and more states have been joining the ranks of those passing legislation requiring businesses with a tax presence (called a tax nexus) in their state to charge sales taxes for online transactions. More recently, states like California have required businesses with affiliates in their state (hence, the "Amazon" link, because of its many affiliates) to comply with these regulations.

In 2013, Congress initiated new legislation called the Marketplace Fairness Act which would require taxation of all online transactions, but it's complicated and difficult to enforce. The bill is currently stalled in Congress with little hope of being enacted anytime soon.