Wednesday, December 03, 2014
Tweet[IWS] CRS: TAXATION OF INTERNET SALES AND ACCESS: LEGAL ISSUES [1 December 2014]
IWS Documented News Service
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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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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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