Overview of Sales Tax on Online Purchases
Sales tax on online purchases refers to the taxes imposed by individual U.S. states on goods and services bought over the internet. Traditionally, sales tax applied mainly to in-store buying, but the rapid growth of e-commerce has prompted states to update tax laws to capture revenue from online sales.
Background: The Impact of the Wayfair Decision
Before 2018, many online purchases from out-of-state sellers were exempt from sales tax if the seller had no physical presence (like a store or warehouse) in the buyer’s state. This meant consumers often avoided paying sales tax, disadvantaging brick-and-mortar stores and diminishing state tax revenues.
The 2018 Supreme Court ruling in South Dakota v. Wayfair overturned this requirement of physical presence. Now, states can mandate remote sellers to collect sales tax if they exceed certain sales amount or transaction numbers, known as economic nexus thresholds.
How States Determine When to Collect Sales Tax
Following Wayfair, states set specific economic nexus thresholds—usually based on total sales revenue or number of sales transactions within the state. For example, if an online seller surpasses $100,000 in sales or 200 transactions in a state, they must register, collect, and remit that state’s sales tax.
Thresholds vary significantly; California requires sellers to collect tax if annual sales exceed $500,000, whereas Florida may require collection after $100,000 in sales and 200 transactions. It’s important for sellers to monitor these thresholds across states where they sell.
Types of Goods and Services Subject to Sales Tax
Most states tax tangible physical products sold online. However, the taxation of digital goods (e.g., downloadable music, eBooks, or software) and services (e.g., streaming, consulting) varies widely. Some states tax digital products as they would physical goods; others exempt such sales.
Responsibility for Paying Sales and Use Tax
Online sellers meeting nexus thresholds are generally responsible for collecting sales tax at the point of sale and remitting it to the relevant states. This system simplifies compliance for buyers since the seller handles tax collection.
If sellers do not collect sales tax (e.g., small sellers below thresholds), buyers may owe use tax, which is a complementary tax levied on out-of-state purchases not taxed at sale. States require taxpayers to report and pay use tax on their income tax returns or through other mechanisms.
Example: Buying Electronics Online
Suppose you purchase a laptop from an online retailer based outside your state. If your state has an economic nexus with that seller, the online retailer must add the applicable sales tax to your order and remit it to your state’s tax authority, ensuring tax compliance.
Effects on Small and Large Online Businesses
Small businesses selling online face challenges tracking tax laws in multiple states, as each state’s thresholds and product taxability vary. Many use automated sales tax software to navigate these rules, but compliance remains a growing administrative task, particularly after the Wayfair ruling.
Common Misconceptions
- No sales tax collected means no tax owed: Buyers may still owe use tax if sellers don’t collect tax.
- All online sales are taxable: Rules depend on the product type and the buyer’s state.
- Threshold confusion: Sellers sometimes fail to recognize nexus thresholds, leading to non-compliance.
Sample State Sales Tax Thresholds
| State | Sales Threshold | Transaction Threshold | Notes |
|---|---|---|---|
| California | $500,000 | None | Applies strict rules including some digital goods |
| Texas | $500,000 | None | Requires collection on most online sales |
| New York | $500,000 | 100 | Includes marketplace facilitators |
| Florida | $100,000 | 200 | Applies post-threshold |
Note: Always verify current rules on state tax authority websites as laws evolve.
Tips for Buyers and Sellers
- Buyers: Check if the seller collects sales tax. If not, understand your state’s use tax rules to avoid surprises during tax filing.
- Sellers: Track sales volumes and transactions by state. Utilize tax software for compliance and consult tax professionals when selling in multiple states.
- Stay updated on changing tax laws, especially regarding digital goods and marketplace sales.
Frequently Asked Questions
Q: Do all states require sales tax on online purchases?
Most do following the Wayfair decision, but a few still have exceptions. Always consult your state’s tax department.
Q: What happens if an out-of-state seller doesn’t collect sales tax?
You may be required to pay use tax directly to your state.
Q: Are digital products taxed the same as physical goods?
Tax treatment varies by state, with some taxing digital products fully and others exempting them.
Additional Resources
For comprehensive details, visit the IRS Sales and Use Tax page and Consumer Financial Protection Bureau’s guide on online sales tax.
Understanding state sales tax on online purchases helps both consumers and sellers comply with tax laws and avoid penalties. Because state rules differ, staying informed and organized is crucial in the evolving e-commerce landscape.