Sales and use tax is imposed on the purchase of non-exempt tangible personal property at the rate in effect where the purchase is sourced. When that property is shipped to the purchaser, such as with internet sales, the site is generally sourced to the place where the property is shipped; this is known as destination-sourcing. But how does the rise of retailers using physical showrooms to facilitate online sales complicate that traditional rule?
Men’s clothing retailer Bonobos has an atypical sales strategy. Though they began as an online-only retailer, they have begun opening physical locations. But unlike a typical clothing store, these locations are only for consultations and trying clothes on; the actual purchase occurs online, although it is facilitated by the store’s employees, and is shipped to the customers directly. Where is this sale sourced? For states who have adopted the language of the Streamlined Sales and Use Tax Agreement, Section 310.A(2) says that “[w]hen the product is not received by the purchaser at a business location of the seller, the sale is sourced to the location where receipt by the purchaser  occurs.” Missouri, addressing a similar hypothetical involving furniture in 2017, considered the sale to be sourced to where the furniture was delivered, rather than to the physical location where the furniture was ordered.
The car company Tesla has a similar buying process. Although Tesla has physical locations, these serve as showrooms and service centers. Customers make their purchases online and the car is shipped to a showroom, or directly to the customer if they live far away from a showroom. If they follow the language of the SSUTA, states would likely source the sale to where the customer accepted delivery of the car. In any event, most states require proof of sales or use tax paid on a car when registering it with the state.
So it appears that these kinds of showrooms don’t currently affect the sourcing determination for most internet sales, but if this trend continues states may be motivated to address the rise of internet sales facilitated by physical locations.
This is not the only unique sales tax sourcing question raised by Tesla. No states have yet issued guidance on the sales tax treatment of a Tesla shipped via Falcon Heavy rocket to Mars.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: How should physical locations affect sourcing online purchases?
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