Do You Collect Sales Tax When Running an Ecommerce Business?

When you run a business with a physical storefront, the answer to this questions is easy and straightforward. You charge your customers the sales tax required by the jurisdiction where your business is located.  However, if you own an ecommerce business and sell online, collecting sales tax is a bit different. In this post Pure-Ecommerce will review this important topic to help you better understand this area if you are a current internet business owner of thinking of becoming one.

Collecting Taxes Online
As explained by the Small Business Association, “the physical presence is known as a ‘nexus’. Each state defines nexus differently, but all agree that if you have a store or office of some sort, a nexus exists. If you are uncertain whether or not your business qualifies as a physical presence, contact your state's revenue agency. If you do not have a physical presence in a state, you are not required to collect sales taxes from customers in that state.” This rule is based on a 1992 Supreme Court ruling in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state.

When you own an internet business you are required to apply for a Sales and Use Tax Certificate from your state. When starting an internet business is always best to consult with your state Department of Revenue, a local accountant and/or attorney as they are abreast to the latest laws governing sales tax.

Consumers' Responsibility to Pay Sales or Use Taxes
As it stands now consumers who live in a state that collects sales tax are technically required to pay the tax to the state even when an Internet retailer doesn't collect it. When consumers are required to pay tax directly to the state, it is referred to as "use" tax rather than sales tax. There are currently five states that don't have a sales tax -- Alaska, Delaware, Montana, New Hampshire, and Oregon.

The Tides of Change
In recent years there has been pressure from the Streamlined Sales Tax Project (a group created by states supporting the Streamlined Sales & Use Tax Agreement) has ended that practice of avoiding sales taxes. Under the Marketplace Fairness Act, state governments that want to collect the tax will have to provide companies with free software for calculating taxes and set up one state entity to receive the payment. The Marketplace Fairness Act Online is proposed legislation pending in the U.S. Congress that would enable state governments to collect sales taxes and use taxes from remote retailers with no physical presence in their state. A similar bill was considered during the 112th Congress, but expired without enactment.  According to, the earliest this bill could go into effect is July 1, 2014.

The current bill, the Marketplace Fairness Act of 2013, was introduced on February 14, 2013, in the House. It was introduced a second time in the Senate on April 16, 2013 and was passed there on May 6, 2013. All three bills are virtually identical and would allow states to require online and other out-of-state retailers to collect sales and use tax.

Exception for Small Internet Business Owners
Do not let this act “scare” you off from being or becoming an internet business owner. There is an exception present for those retailers who qualify for the Small Seller Exception. To qualify for the SmallSeller Exception a retailer must have less than $1,000,000 of total remote sales (in the United States) within the preceding calendar year.

The internet has been what some will call a “tax-free” zone for many years, but in the coming years we will find out if this will remain the same as Congress and state legislatures wrestle with this issue. Naturally, there is a great deal of opposition as the government seeks to overturn the 1992 Supreme Court ruling. Even if the Marketplace Fairness Act is put into place, at least the government is giving Small Internet Business owners in the U.S. an exception to the rule as a show of support!

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Linda said...

Great article! Thank you Jen - Linda H

Linda said...

Great Article Jen - thank you for publishing!

Linda H