Are Internet Purchases Sales Tax-Exempt?
- April 24, 2016 | Tim Parker
If you’re confused about how sales tax works online, you’re not the only one. It’s a tangled web of loosely written laws that vary drastically from state to state. But it’s something you have to understand if you’re an Internet marketer.
It’s All About Nexus
Never heard of nexus? If you’re in the ecommerce business, nexus isn’t just something you have to understand -- you have to gain high-level knowledge of how it works.
Each state decides if your customer owes sales tax based on whether or not you established a presence, or nexus, in their state. If you did, you have to make sales tax payments based on their tax laws.
You can establish nexus in several ways, which vary by state. For example, you may have nexus if you maintain an office or an employee in the state, if you have a warehouse there, or if your products are stored in and shipped from a distribution center there. If you’re an Amazon FBA seller and your product sits in one of the company’s warehouses, that likely establishes nexus there. If you have affiliates operating from a certain state, that probably creates nexus as well.
Some States Are Tax-Free
But not all states have a sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon don’t charge a sales tax, That doesn't mean that these states don't find ways to collect their fair share. Delaware, for example, collects a gross receipts tax but don't worry, ecommerce retailers won't be on the hook.
What About Sales Tax Holidays?
A lot of states have sales tax holidays. As an online retailer you have to observe those tax holidays, which can present a logistical nightmare considering the exemptions only apply to certain items purchased by customers in certain states on certain days. Many retailers use shopping cart software programmed to observe these holidays automatically.
What About Tax Exemptions?
Businesses that do business with other businesses may not have to collect sales tax because goods purchased for resale are generally tax-free. Some items are exempt if they are used to produce other goods for resale. If you run an online service business, one that sells no physical products, your customers won’t owe sales tax unless you establish nexus in New Mexico, South Dakota, or Hawaii -- states that do require tax on some services.
There are also the many exemptions that each state puts into effect. Seven states currently don’t charge sales tax on clothing purchases. New York has different tax laws depending on if your bagel is sliced or not, Texas allows tax free purchases of belts but not belt buckles, and Alabama charges a 10 cent tax on cards with less than 54 in the deck.
All of this applies to online sales as well as those in brick-and-mortar stores. If you establish nexus in a state, you have to follow all of that state's sales tax laws, including exempting the appropriate items from sales tax -- even if it's belts and playing cards.
What About Nonprofits?
It's true that nonprofits officially established through the IRS are generally exempt from paying sales tax, but there are plenty of exceptions to that rule. Just like for-profit businesses, the rules and exemptions vary by state.
Also, just because a nonprofit might not be required to pay sales tax, that doesn't mean it doesn't have to collect it on any goods it sells. We have plenty more information on this subject here.
Sales tax is a cumbersome topic for online retailers because they’re responsible for knowing, understanding, and applying the widely differing laws that each state enacts. Depending on how many states you sell into and where you have nexus, you might want the help of software or other services that automatically adjust as tax laws change.