Sales and Use Taxes for E-Commerce Transactions

Examining Court Decisions and Pending Legislation

Bonnie K. Klamm, PhD, CPA, and Jill M. Zuber, PhD, CPA

Most states impose sales and use taxes on retail sales of certain tangible personal property. Sellers with a physical presence in the state must report their taxable sales and remit the appropriate amount of sales tax. Sellers without a physical presence in the state are not responsible for collecting sales tax, although consumers who purchase goods from out-of-state sellers for consumption within their resident state are responsible for paying a use tax to that state. Thus, physical presence—or “substantial nexus,” from the Latin word nectere, meaning a connection, link, or tie—is a key determinant for calculating a seller's sales tax responsibility. Through legislation, states are challenging the fact that out-of-state sellers are only required to collect sales tax from a purchaser when they have a physical presence in the state. States are broadening the meaning of nexus with regard to electronic commerce (e-commerce) transactions in an attempt to expand the use tax base and increase tax filing requirements.