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Internet Sales Tax: Are You a Remote Seller?

Defining the difference between remote sellers and in-state sellers
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As an online retailer, you have probably heard the term “remote seller” being used in various media outlets to explain online retailers in general. However, I think this term creates a lot of confusion with small-business owners who make their living selling online via the various marketplace sites (e.g., eBay, Amazon, etc.).

The definition is particularly important when discussing Internet sales tax.

Typically the media will classify any online retailer as a remote seller, without regard to anyone in particular. Most online retailers will fall into the category of “remote seller” in some states, but not all. To properly understand this concept we must first examine the definition of each class of seller.

A remote seller, by the simplest definition, is one who has no physical connection to the state in which he or she is generating sales and shipping product. This means no storefront location, no office, no residence, no salesman and no inventory. Compare that to an in-state seller (also known as a retailer), or one who has a physical presence in the state in which they are selling or shipping product.

Physical presence is key

It is important to note that the difference is physical presence. As you can see, you can be both, depending upon the state in question. For example, I live in Houston, and I sell online via eBay.

I have sales within the states of Texas, Arizona, Indiana and Nebraska. I would be considered a retailer in Texas because I live in Texas, my business is located in Texas and I have inventory in Texas. Conversely, I would be a remote seller in the other states since I do not have any physical presence in those states.

Another example must be discussed: the Amazon seller. Let’s use the same example above, but assume that I have inventory located in Arizona and Indiana.

Using the physical presence standard, I would be considered a retailer in Texas, and more than likely would be considered a retailer in Arizona and Indiana, while remaining a remote seller in Nebraska. This is so because I own inventory in two states in which I do not live, but I conduct business in those states and have a physical presence.

As of the date this article was published, Nebraska does not have an Amazon warehouse, thus not allowing me to store inventory and not meeting the physical presence requirement.

Not a clear-cut argument

Some have argued that just maintaining inventory in a state does not meet the threshold of nexus. I argue that, as an online seller—particularly if you use Fulfillment By Amazon—you probably do meet the threshold of nexus in those states since you, as an online seller, would suffer economic loss if, say, the warehouse in which you owned inventory burned down.

True, Amazon or an insurance company of some sort could probably compensate the inventory owner, but if you’re seeking compensation for lost inventory, you must have owned it.

Remote sellers are a hot topic in the current legislative environment and, until there is a good, definite, bright-line test of where a remote seller must collect sales tax, it is wise to stick to the physical presence test in the states in which you are engaging in online sales and shipping product.

I just launched a book, co-authored with e-commerce expert Kat Simpson, about Internet sales tax and how you can be sure that you are legally compliant. Introduction to Sales Tax for Amazon FBA Sellers is available in trade paperback or Kindle versions on Amazon. You can also sign up for my newsletter and send in your own questions on this topic on my E-com Sales Tax blog.

About the author

Michael K. Rice, CMI
Michael K. Rice, CMI, is the Managing Director of Diligencia LLC, based in Houston, TX. He advises and assists clients on various sales and use tax matters including audit management/assistance, business registrations/start up, compliance, transaction planning and refund reviews. With more than 12 years of sales and use tax experience, Michael has spent time in both the public and private sector. Prior to forming Diligencia, Michael worked for a mid-cap oil and gas services and construction company managing all indirect taxes including sales/use, federal excise and property taxes. Prior to that Michael was with one of the largest independent power producers in the United States managing the sales/use tax function. Michael also has public accounting and consulting experience, serving clients from industries such as retail, manufacturing, oil and gas services, and telecommunications. Additionally, Michael has served on the other side of the table as an auditor for the Louisiana Parishes, performing sales and use tax audits of various industries from retail to manufacturing. Michael is a member of the Institute for Professionals in Taxation and has obtained the CMI destination for professional recognition in the field of sales/use tax. Opinions expressed here may not be shared by The Online Seller and/or its principals.

  • Costaricasix

    I live in Mexico; my PayPal bank is in the US; I mail from a border city in Texas.  Would I have to collect sales tax and for who?

    • Lita618

      from what is explained in the article you seem to be a remote seller.

      • Sher

        What would I be? I live in Jamaica and my products are in Jamaica but I sell to the US (and other countries) and the money is sent to a bank a/c in the US?

  • http://www.facebook.com/shondra.fowler Shondra Fowler

    I sell stuff on eBay that I bought and paid sales tax on.  These are my personal belongings.  If I sell to someone in Washington where I live and where my inventory is, I see no reason to charge someone sales tax nor report the income becuase it was my income in the first place that bougth the stuff I’m selling!  So confusing…

    • michael rice

      Shondra – your concern is one that many sellers have and it is a valid concern but you have to be careful because you are bordering on both income tax and sales tax by not reporting the income from the sale.  I don’t want to comment on the income tax issue but from a sales tax perspective they are technically two transactions.  One when you bought the item and used it for a certain period of time then decided to sell it.  Most states will look for sales tax even if the item is used if you have nexus in that state. As an ebay seller you probably only have nexus in the state in which you live.

      Michael Rice

    • http://www.stores.ebay.com/her-country-cottage Susan

       You shouldn’t be paying income tax on the total amount you sell, only on your profit. The price you paid for an item is deductible as a “cost of goods sold.” The profit is income, and like everyone else, you have to pay income tax on it.

  • Don Gentry

    The day they charge me taxes on my out of state eBay sales is the day I quit.  I can barely afford eBay now.  If I lose more money I might as well throw my inventory in the river and forget the whole thing!
    ( Have over 1,000 listings on eBay and some things on 5 other sites.) I will cancel them all it they get into my pocket for more money! Then of course I would have no need for you either.
    Don

    • http://www.stores.ebay.com/her-country-cottage Susan

       Why on earth would you pay sales tax out of your own pocket? EBay allows you to pass sales tax to the buyer.

  • Sloantech

    If I understand right Amazon and other merchants are ceasing to allow affiliates to sell for them in certain states which collect Internet sales tax – precisely to avoid having a physical presence (ie  virtual, but real sales person.) If this is correct, then could this spell the end of affiliate marketing? If this is not correct, could you elaborate?

  • Carolyn Stewart

    Michael, Which NAICS code should I use for an ebay business ? Need this to get a DBA and tax permit. Thanks in advance. Carolyn Stewart