What You Need to Know About Online Auction Sales Tax
Background, Issues, Updates
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 that the state lists as taxable. For example, if you sell clothing in Iowa, you must collect sales tax from your customers and then report to the state and pay the amount collected, according to Iowa law. While some states do not 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.
S. Dakota v. Wayfair, Inc., was a United States Supreme Court case decided in 2018. The court held by a 5-4 majority that states may charge tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
Also, a proposed law in Congress (the Remote Transactions Parity Act) is under consideration as of May 2018.
What Is the Problem With Taxing Online Sales?
States have several problems when collecting sales taxes on internet sales:
- Sales are difficult to monitor. How does a state track all of the millions of daily internet transactions and decide which are by companies with a presence in the state?
- The more aggressive the state becomes in pursuing this issue, the more likely it is that they will lose businesses. A business in northern California, for instance, could relocate to Oregon, which has no state sales tax. Multiply that one business by thousands and the state's hoped-for revenue increase might never be realized.
- 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?
If you have a non-Internet sales business with 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.
If you sell online to in-state customers, 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 is not new; you should already be doing this.
If you sell online to out-of-state customers, you do not 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 have an affiliate relationship with a larger company such as Amazon.com or Overstock.com. 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).
However, California law says that since your company, as the affiliate, is located in a state, it is 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.