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[IWS] CRS: TAXATION OF INTERNET SALES AND ACCESS: LEGAL ISSUES [1 December 2014]

IWS Documented News Service

_______________________________

Institute for Workplace Studies-----------------Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor--------------------Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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This service is supported, in part, by donations. Please consider making a donation by following the instructions at http://www.ilr.cornell.edu/iws/news-bureau/support.html

 

Congressional Research Service (CRS)

 

Taxation of Internet Sales and Access: Legal Issues

Erika K. Lunder, Legislative Attorney

December 1, 2014

https://www.fas.org/sgp/crs/misc/R43800.pdf

[full-text, 16 pages]

 

Summary

In recent years, there has been significant congressional interest in the states’ ability to impose

sales and use taxes on sales made over the Internet. While these taxes are imposed on the

consumer, states generally prefer that retailers collect and remit them, rather than relying on the

consumer to pay the tax. State laws requiring retailers to collect sales and use taxes are subject to

federal law. First, such laws must comply with the U.S. Constitution, of which two provisions are

particularly relevant—the dormant Commerce Clause and the Fourteenth Amendment’s Due

Process Clause. Second, such laws must comply with the Internet Tax Freedom Act.

 

Both the dormant Commerce Clause and the Due Process Clause require that a retailer have a

certain connection or “nexus” to the state before the state can require the collection of tax. The

Supreme Court has held that the required nexus under the dormant Commerce Clause is the

seller’s “physical presence” in the state, while due process requires only that the seller have

directed purposeful contact at state residents. Notably, Congress may change the “physical

presence” standard under its power to regulate interstate commerce, so long as it is consistent

with other constitutional provisions including due process. In the 113th Congress, the Senate has

passed the Marketplace Fairness Act of 2013 (S. 743), which would allow a state to impose sales

and use tax collection duties on remote sellers, regardless of physical presence, if the state (1) is a

member of the multistate Streamlined Sales and Use Tax Agreement (SSUTA) or (2) sufficiently

simplifies its sales and use tax laws and administration.

 

In addition to the Constitution, state sales and use tax collection laws must also comply with the

federal Internet Tax Freedom Act (ITFA). It imposes a temporary moratorium on states imposing

discriminatory or multiple taxes on electronic commerce. The moratorium also generally

prohibits state taxes on Internet access. The act is scheduled to expire on December 11, 2014.

 

Meanwhile, some states have recently enacted laws, often called “Amazon laws” after the

Internet retailer, in an attempt to capture uncollected taxes on Internet sales while still complying

with the “physical presence” standard. States enacting these laws have used two basic

approaches: (1) “click-through” nexus, which imposes the responsibility for collecting taxes on

retailers who compensate state residents for placing links on their websites to the retailer’s

website and (2) requirements that remote sellers provide information about sales to the state and

the customers.

 

State Amazon tax laws have raised issues under both the U.S. Constitution and the ITFA and have

had a mixed reception in the courts. While the highest court in New York upheld that state’s clickthrough

nexus law against facial challenges on Commerce Clause and due process grounds, a

federal district judge struck Colorado’s notification law as violating the dormant Commerce

Clause. However, the appeals court subsequently determined that federal courts do not have

jurisdiction to hear the Colorado challenge due to the federal Taxpayer Injunction Act. On

December 8, 2014, the U.S. Supreme Court is scheduled to hear oral arguments on whether the

Taxpayer Injunction Act applies in this case (Direct Marketing Association v. Brohl). With respect

to the ITFA, the Illinois Supreme Court held in 2013 that the state’s click-through nexus law

violated the statute’s moratorium on discriminatory taxes because it treated retailers engaged in

online performance-based marketing differently than those with similar print and broadcast

marketing arrangements.

 

Contents

Constitution’s Nexus Requirement .................................................................................................. 1

When Is There Sufficient Nexus? .............................................................................................. 3

State “Amazon Laws” and Their Constitutionality ................................................................... 4

Congressional Authority to Act ................................................................................................. 6

Marketplace Fairness Act and Other Legislation ................................................................ 6

Internet Tax Freedom Act ................................................................................................................ 7

Moratorium on Multiple and Discriminatory Taxes on E-Commerce ....................................... 8

Moratorium on Taxes on Internet Access .................................................................................. 9

ITFA and Federal Taxes ........................................................................................................... 11

Internet Tax Freedom Act and State “Amazon Laws” ............................................................. 11

Legislation Related to ITFA and Similar Concepts ................................................................. 12

 

Contacts

Author Contact Information........................................................................................................... 13

 

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This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

 

 

 

 

 

 

 

 

 




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