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Department of Finance: Division of Revenue

INTERNET SALES

The taxation of Internet services is one of the hottest topics in the country for tax administrators in every level of government. Some states have enacted legislation and/or issued regulations concerning sales tax for businesses operating over the Internet. Delaware is not one of those states.


Establishing an Internet Site


At the present time, Delaware's position on the issue of establishing an Internet site is that persons conducting business via the Internet are not treated any differently than persons conducting business by traditional means. The Due Process and Commerce Clause provisions of the U.S. Constitution require that there be a minimal contact or presence in the taxing jurisdiction by the business. There are many activities - too many to list here - which create the jurisdictional right to tax, referred to as "nexus". It is our position that merely creating an Internet site by a non-Delaware business does not, by itself, create nexus. But, locating a server in Delaware would create nexus/jurisdiction to tax the respective business.



Delaware imposes two general taxes on businesses:

1. Taxes based on income: Corporate Income Tax

Delaware's corporate income tax is based on federal taxable income that is apportioned based on a ratio of property, wages and sales in Delaware to total property, wages and sales everywhere. Sales of goods physically delivered in Delaware are included in the numerator of the sales factor.


2. Taxes based on sales of goods or services: Gross Receipts Tax

Sales of goods are subject to Delaware gross receipts taxes as a wholesale sale - where the goods are re-sold - or as a retail sale - where the goods are consumed by the purchaser. Wholesale sales are based on destinations within Delaware (same basis as corporate income tax) and retail sales are based on the passage of title within Delaware.


Income received from the sale of services - accounting/bookkeeping, auto repairs, counselors, doctor's office, entertainers, health clubs, trash removal and many more - is also a taxable gross receipt.


Frequently Asked Questions

The following questions were posed to the Division of Revenue by the Software Publishers Association of 1730 M Street, NW, Suite 700, Washington DC 20036-4510


Q.  Are there any tax laws in Delaware that apply to electronic commerce transactions?

A.  No.


Q.  Do any statutes in Delaware apply specifically to electronic software distribution  (i.e. downloaded) over the internet?

A.  No.


Q.  Do any statutes in Delaware apply specifically to the purchase of goods ordered over the  Internet and received in tangible form?

A.  No.


Q.  Is there any liability placed on the buyer or vendor of downloaded software over the Internet? Is electronically distributed software considered tangible personal property? And what liabilities are placed on the buyer and vendor of tangible goods over the Internet?

A.  It is our current thinking that the mere use of the Internet as a vehicle for selling tangible property or intangible personal property will not create nexus in the market state. Since Delaware does not have a sales tax, the purchase of software will not create a tax liability for the purchaser.


Q.  Are services performed over the Internet, such as providing financial information for a fee, subject to sales tax? What tax rate and state would be used? Is the tax rate based upon where the service is performed or where to whom it applies?

A.  Chapter 23 of Title 30 of the Delaware Code imposes a license fee and gross receipts tax on various services rendered within the state. It is our unpublished opinion with respect to services provided via the Internet, that such services are determined by the location of the server or mainframe from which such information was accessed.



For additional information on Internet taxation in Delaware, please contact Michael Smith at michael.x.smith@state.de.us or by calling (302) 577-8445.


The Software Publishers Association can be reached on the Internet at http://www.spa.org/.

Last Updated: Tuesday, 26-Aug-2008 08:16:16 EDT
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