Sales Tax Basics (Sales Tax 101):

Internet Tax & Streamlined Sales Tax (SST)

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Internet Tax:

In 1989, President Clinton signed into law the Internet Tax Freedom Act. It has continually been extended and is still in effect today. The Internet Tax Freedom Act does not provide an exemption from sales or use tax for sales made over the internet.

The internet is, for sales tax purposes, in essence a virtual catalog. And the principles handed down from U.S. Supreme Court cases such as Quill (referenced in the "Sales Tax - What and Why" section), are applicable to sales over the internet. If the seller has nexus in the state to which the order is to be shipped, the seller should collect and remit those taxes. If no tax is charged to the purchaser (presumably because the seller does not have nexus), then the purchaser must remit the requisite use tax to the state.

Note: For sales to consumers, where no tax is charged, many states (including New York and California) have provided a line on their individual income tax returns asking individual consumers to remit any tax on items purchased online.

Some sales over the internet might not be taxable if the sale is exempt for other reasons. An example is certain types of software, in certain states. (The states are not uniform in their treatment of software transmitted over the Internet.) In some states the electronic transmission of software to a purchaser is exempt from sales tax. However, in others, such as Texas, the sale of canned software transmitted over the internet is still taxable.

Why It's Important: Some people mistakenly believe that the Internet Tax Freedom Act provides freedom from sales taxation on items sold over the internet. As mentioned above, the internet is akin to a catalog. Sellers of items via the internet must collect and remit applicable sales tax if the seller has nexus in the state of the destination of the sale. If the seller does not have nexus, the seller is not yet required to collect and remit the tax.

Streamlined Sales Tax (SST):

Since 2000, numerous states have banded together in the hopes of simplifying sales/tax schemes in an effort to ease the burden of compliance for taxpayers. The goal, ultimately of the SST is to ask the U.S. Congress to overturn the Quill decision (discussed above), that requires companies to have nexus in a state before imposing a collecting and remitting responsibility. The states argue that they are losing revenues as commerce transacts over the internet because companies can still shield themselves from having to collect taxes if they don’t have nexus, and consumers are likely not remitting the use tax directly to the state.

As of 2011, twenty(20) states have become Full Member states and are in some level of conformity - and four(4) are Associate Member states. Unfortunately, for SST, some of the largest states in the union including California, Texas and New York, to name a few, are not yet (nor may they ever be) in conformity.

See the comprehensive Streamlined Sales Tax (SST) section which follows for detailed information regarding the SSTP.

Why It's Important: For many years, "nexus" has been the defining standard as to whether a company must collect and remit sales/use tax. If Congress overturns the Quill decision by enacting legislation which would not require such a standard, all companies would have to begin collecting and remitting the appropriate sales tax on sales in interstate commerce.

Don't forget to check the following Sales Tax 101 sections to learn more about sales tax:

Sales Tax 101 - What is Sales Tax?

Sales Tax Nexus, TPP & Exemptions

Sales Tax Registration to Compliance

Sales Tax Audits & Acquisitions