When making sales or conducting business on the internet, it is easy to overlook state sales tax. Whether you make a sale of tangible property online, on the phone, by fax, via a purchase order, or other medium, you are required to collect and remit sales tax on sales made within the state in which you operate (i.e. where your headquarters is located, where you own property like consignment inventory, and where you or your employees physically work).
But what about sales made to other states? And what about sales of digital goods or electronically provided services? These can be gray areas and the outcome may differ in each state.
Your obligation to collect and remit state sales tax depends on whether you have “nexus” in the state. Generally, you have nexus if you have some kind of physical presence in the state. For example, if you own or rent property (i.e. an office, a warehouse that holds your consignment inventory, or equipment), or perform some kind of an activity in the state (such as sending employees or independent sales agents into the state), you will likely be required to withhold sales tax.
Many states consider an intangible presence or other connection with the state sufficient to assert nexus over a company (and the corresponding obligation to collect sales tax). For example, some states claim nexus if the servers on which a company hosts a website are located in the state. A few states claim nexus based on software that is hosted outside the state and merely licensed into the state. Other states assert “attributional nexus” where a third party who is physically present in the state establishes and maintains an out of state seller’s in-state market. Attributional nexus is often found where a third party sends emails on behalf of the out of state seller or places hyperlinks to the out of state seller’s website on its own website.
Although sales tax is typically thought of as being imposed upon the sale of tangible personal property, many states impose sales tax on the sale of intangible property and electronically provided services. For example, some states impose sales tax on digital products, such as ebooks, music, movies, videos, and photographs, whether downloaded or streamed to a computer, tablet, phone, or other electronic device. Similarly, some states tax downloaded or remotely-accessed software and other apps.
Taxable electronically provided services may include traditional services that happen to be provided via the internet, such as dating services, advertising services, or various professional services. More commonly, electronically provided services may include information services (such as research sites like Checkpoint and Westlaw), data processing services, electronic storage services, social networking and gaming. These services are often broadly defined. For example, a state may consider online access to tax return preparation software to be a taxable data processing service. Some states specifically tax cloud computing services, including SaaS (Software as a Service), IaaS (Infrastructure as a Service) and PaaS (Platform as a Service), while other states consider cloud computing services to be a taxable information service or data processing service.
States that assert some kind of attributional nexus or that tax many common e-commerce transactions include Arkansas, California, Colorado, Connecticut, Georgia, Illinois, New Mexico, New York, North Carolina, Rhode Island, Texas, Washington, Wisconsin, and Washington D.C. This is by no means a complete list. Not all e-commerce transactions in those states are taxable and e-commerce in other states is not always exempt from sales tax.
The rules regarding the taxation of e-commerce vary by state, so even if you are not required to collect and remit sales tax in one state, you may be required to collect and remit sales tax in another state. It is best to check the rules of each state where you have property, employees or independent contractors, and each state where you make sales to determine whether you have any sales tax obligations in those states.