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  • Writer's pictureRandall Fisher

E-Commerce: “Physical Presence” Sales Tax Collection

You don’t have to look hard to find the advantages internet retailers enjoy over their brick-and-mortar counterparts — and I’m not just talking about the lack of a enraged landlord banging down the door for this month’s rent (not to mention last month’s).

Indeed, lower overheads in general is a key reason why the e-commerce business model can offer the consumer more choices and more convenience at lower prices than rivals with physical premises maintain. But lower taxes, too?

As a matter of fact, yes.

You see, notwithstanding the myriad legal challenges pending around the country, internet retailers are not required to collect sales tax from many of their customers. That savings translates to the modestly lower prices that 2 out of 3 online shoppers indicate as the reason they shop online.

The “Physical Presence” Rule

Pursuant to the 1992 U.S. Supreme Court decision in Quill Corp. v. North Dakota, mail-order businesses — now understood to include online businesses — are only required  to collect sales tax on internet sales to customers in those states where the business maintains a physical presence.

Basically, if your business pays rent, tax, or commission in a given state, then you’ll need to collect sales tax there as well. More specifically, in the eyes of the court a “physical presence” includes: 

  1. having a warehouse in the state;

  2. having a store in the state;

  3. having an office in the state; or

  4. having a sales representative in the state.

The State of Maryland — to whom my corporate law office pays tax — expands the physical presence rule with the broadly-worded requirement for sales tax on any person who “engages in the business of an out-of-state vendor” (Code of Maryland Regulations

Generally, though, if your business doesn’t maintain a facility or representative in the same state as your customer, then you don’t have to collect sales tax from them — and you can offer them a price that much lower.

The “Nexus” Wrinkle

The Supreme Court’s Quill decision featured not just the “physical presence rule” conclusion but also a careful discussion of the specific relationship between between a business and a state that it termed the nexus. The court considered two variations of the nexus as derived from two distinct Constitutional provisions: the Due Process Clause and the Commerce Clause. However, the Commerce Clause nexus was ultimately determined to be the more relevant variation, which essentially boils down to the physical presence rule.

Although the relevant Maryland statute on the sales and use tax does not use the term “nexus,” the state’s Comptroller mentions it in its sales tax collection advice to out-of-state vendors. So if you live somewhere other than Maryland, this may help you reverse engineer your potential liability. But an important warning: My blog constitutes legal discussion, not legal advice you should take. You first need to confirm with the state where you live or are considering doing business.

Note the Maryland Comptroller is clear that a physical presence does not need to be “substantial” to require collection of sales tax, but only greater than the “slightest presence.” What isn’t clear is what this means legally. Nevertheless, the bottom line is straightforward enough: businesses that do not have a “physical location” or “deliver services” in Maryland are not required to collect sales tax.

The Use Tax and Exempted Sales

Maryland also enforces a use tax to complement the sales tax. Essentially, the state expects customers to pay the sales tax when businesses do not levy it, only when the customer pays the sales tax directly to the state instead of to the business, it is referred to as a “use tax.”

Interestingly, some items like the state flag may be exempt from sales tax under Maryland law (see Maryland Code 11-201 through 11-231). Additionally, Maryland offers an annual tax-free week for specific certain apparel purchases every August (COMAR Your state may offer similar advantages.

Sorting through the application of the sales tax to online business can be a muddled affair but with e-commerce expected to grow by 45% in the next three years, it’s a safe bet that the physical presence rule for sales tax collection will evolve so states can keep up with how technology redefines business-as-usual. So keep an eye on the headlines since the rules are likely to change.

Until then, good luck and good hunting.



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The Fisher Law Office is known for its experience in estate planning, probate administration, asset protection, and business development. Annapolis attorney Randall D. Fisher has practiced for over 20 years, maintains the highest peer review rating for ethics (AV Preeminent) by Martindale-Hubbell, and is a sucker for long walks on the fairways.

Find out how to reach Randy via or find him at, on Twitter @thefisherlawoffice, or at

Image(s): CC licensed for commercial use. Source Fosforix neither approves nor endorses the content of this blog and the Fisher Law Office.

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