Online Sales Tax - Background, Issues, Updates

Online taxes
•••   kate_sept2004 / Getty Images 

Traditionally, businesses that have a tax presence in a state (called a tax nexus) must collect, report, and pay sales taxes on items they sell which the state lists as taxable. For example, if you sell clothing in Iowa, you must collect sales tax from your customers, then report to the state and pay the amount collected, according to Iowa law. While some states don't have sales taxes, most do. Check with your ​state's taxing authority for more information on what's taxable in your state and how to register.

But what about online transactions? In 1992 the Supreme Court ruled in the Quill case that a merchant is not required to collect sales tax unless the merchant has a tax nexus (physical presence) in that state. A tax nexus would include a retail store, office, or warehouse.

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. 

A test case, S. Dakota v. Wayfair, is currently under review by the Supreme Court. The Court's decision will be announced in June 2018. Also, a proposed law in Congress (the Remote Transactions Parity Act) is under consideration as of May 2018. 

What's the problem with taxing online sales?

States have several problems in attempting to collect sales taxes on Internet sales:

  • It's difficult to monitor. How does a state track all of the millions of transactions going through the Internet every day and decide which are by companies with a presence in the state?
  • The more aggressive the state gets in pursuing this issue, the more likely it is that they will lose businesses. A business in northern California, for instance, could just pick up and move to Oregon, which has no state sales tax. Multiply that one business by thousands and you can see that the state's hoped-for revenue increase might vanish quickly.
  • Customers can avoid paying sales taxes by using a forwarding service. For example, a company in Oregon forwards purchases (no state sales tax in Oregon) to help customers avoid high sales taxes on Internet transactions.

What does online sales tax mean for your business?

  • Non-Internet Sales Businesses
    • If you have a physical presence (called a tax nexus) in a state and you sell taxable products or services on the Internet, nothing will change. You will keep on selling and collecting/paying sales tax according to state law.
  • Internet Sales to In-State Customers If you sell sales-taxable products on the Internet, you must charge sales tax to customers located in your state. Your shopping cart software should be able to pick up the zip code of the buyer and add sales tax automatically. That's not new; you should already be doing this.
  • Internet Sales to Out-Of-State Customers
    • If you sell online to out of state customers, you don't have to charge sales tax on transactions to buyers outside your state.

What about affiliate sales?

These new state laws only apply at this point to businesses which are located in a state and which have an affiliate relationship with a larger company, such as or Here's how the new state laws work: Let's say you have a used-book business in California and you are an Amazon affiliate. Before the new law was enacted, you would ship a book to someone in California, and Amazon didn't include sales tax because Amazon is doing the selling and forwarding the money to the affiliate (you).

But now California law says that since your company, as the affiliate, is located in a state, it's the location of the affiliate that counts and Amazon must charge sales tax on the affiliate's transaction.

If you are unsure what to do, check with your state's taxing authority.