In today’s digital age, online shopping has become more prevalent, leading to questions about how sales tax applies to purchases made over the internet, especially when the buyer and seller are located in different states. Understanding how sales tax works in these situations is crucial for both consumers and online retailers.
Sales Tax on Online Purchases
For years, many online retailers did not charge sales tax on purchases made by customers located outside of their state. However, the situation has changed dramatically in recent years. The Supreme Court ruling in South Dakota v. Wayfair, Inc. in 2018 allowed states to require online sellers to collect sales tax on purchases made by customers in their state, even if the seller has no physical presence there.
Now, many states have enacted laws requiring online retailers to collect sales tax based on the buyer’s location. This means that when a customer makes a purchase from an online retailer, the retailer must calculate the applicable sales tax based on the shipping address of the buyer, not the location of the seller.
What is Nexus?
The concept of “nexus” plays a critical role in determining when a retailer is required to collect sales tax. Nexus refers to the connection between a business and a state that creates a sales tax obligation. A retailer may establish nexus in a state through various activities, such as:
- Having a physical presence in the state (e.g., offices, employees, warehouses)
- Exceeding a certain sales threshold or number of transactions in the state
- Using third-party services or affiliates located in the state
Once a retailer establishes a nexus in a state, they are required to collect sales tax on sales to customers in that state.
Sales Tax on Out-of-State Purchases
Sales tax on out-of-state purchases depends on whether the seller has nexus in the buyer’s state. If the retailer has a nexus in the buyer’s state, they must collect the appropriate sales tax. However, if the retailer does not have nexus in the buyer’s state, they are typically not required to collect sales tax. In such cases, the buyer may still be responsible for paying a use tax, which is similar to sales tax, when filing their state tax return.
How Online Retailers Account for Sales Tax
To comply with state tax laws, online retailers often use automated sales tax tools to calculate the correct tax rate for each transaction based on the buyer’s location. These tools help ensure that the right amount of tax is collected and that the retailer remains in compliance with varying state tax regulations.
