Income Tax in the U.S
By Aaron N. Wise, Attorney at Law © 2009
Federal Income Tax
If the internet seller is a U.S. corporation (one formed in the USA), it is subject to U.S. federal income tax on its worldwide income, including from internet sales. The same is true for a U.S. limited liability company, except that the LLC owners are responsible to file tax returns and pay the taxes due (the LLC being a tax pass through entity).
If the internet seller is a foreign entity or person, and there is a income tax treaty between his/its country and the USA, normally the seller will not be liable for US federal income tax its internet sales unless it has a “permanent establishment” in the USA (“PE”) with which the internet sales income is effectively connected. If there is no such tax treaty, then rather than “PE”, the issue becomes whether the seller has a US trade or business with which that income is effectively connected, in which case it is taxable. It is not clear whether a website itself can constitute a PE or trade or business in the USA. If the server is based in the USA, that might be a factor. If the server’s host is located in the USA, that might possibly be enough, depending on overall scope of the host’s functions for the internet seller.
State Income Tax
If the internet seller is a U.S. corporation or LLC, and has a place of business or a sufficient physical presence in a particular US state from which it makes internet sales to persons in that same state, it will normally be liable for that state’s income tax on those sales. In general, the same is true for a foreign entity or physical person.
Sales and Use Tax:
Sales tax applies, in general, to sales of non-exempted tangible personal property and possibly certain services, depending on the particular state or municipal law.
As a general rule, if your business is physically located in U.S. State 1 and
• it sells over the internet to a consumer (retail buyer) in that same State, you are probably responsible for collecting and remitting to the State 1 its sales tax on the transaction;
• it sells to a retail buyer in U.S. State 2, probably you are not responsible for collecting sales tax. However, if your business has a “nexus” (which in layman’s terms roughly corresponds to “physical presence” of some significant sort) within State 2, then you may be required to collect the sales tax due in State 2. Maintaining an office, or good inventory, or extensive marketing or promotion, or having employees or even possible sales agents, in State 2, could be enough of a nexus.
If your business is physically located in State 1 and you sell via your internet site, you will normally be considered to be located in that State for sales (and use) tax purposes, even if your internet server and place of shipment of the goods are outside of State 1. With few exceptions, that means you are subject to the sales and use tax laws of the taxing authorities in State 1.
Sales of computer software, whether via the internet or not, may or may not be subject to sales (and use) taxes. That will depend on the particular legislation. Some jurisdictions make a distinction between pre-packaged software and custom made software.
Use tax can result from out-of state purchases of non-exempt tangible personal property and certain other items from sources such as internet sites not intended for the buyer’s resale but its use, storage or consumption. “Out-of-state” generally means outside of the U.S. state in which the purchaser has its place of business (physical presence of some sort, as above).
Sales and use tax, including on internet sales, are complicated areas and can, if you, in fact, are determined to have an obligation to collect and remit and do not, result in significant liability. The laws on collecting and remitting these taxes vary from state to state.
A few disclaimers are in order. First, the sales and use tax area, particularly regarding internet sales, are fact specific—they depend on the particular situation. Second, the sales and use tax laws vary from state to state and are subject to change possibly more than fields. Third, if you think you might possibly be subject to sales tax and use tax, consult an expert.