By Edward Zelinsky
As a critical element of the holiday shopping season of 2009, internet sales have matured into a pivotal part of the American economy. The modest, but important, increase in 2009 holiday sales over the 2008 shopping season is largely attributable to increased online purchases.
This emergence of internet sales highlights an important problem of public finance which, so far, Congress has been unwilling to address: Most internet purchases are effectively sales tax-free even as equivalent purchases at traditional brick-and-mortar stores are taxable. The resulting discrepancy is neither fair nor efficient as conventional merchants, required to collect sales tax from their customers, find themselves unfairly competing with internet sellers who do not.
The legal cause of this discrepancy is the decision of the U.S. Supreme Court in Quill Corporation v. North Dakota. In that case, the Court held that a state, on its own, can only impose sales tax collection responsibilities on a seller with a physical presence in that state. However, Congress, the Quill Court stated, can require out-of-state sellers to collect state sales taxes from their mail order and internet customers. So far, Congress has been unwilling to impose this general sales tax collection responsibility on internet sellers.
As a matter of law, if sales tax is not collected by an internet (or mail order) seller, the customer must himself pay tax on his purchases to the state in which he lives. In practice, the states can rarely enforce this legal obligation to pay sales tax since the states must rely on customers to self-report their internet purchases. Unsurprisingly, compliance with this taxpaying obligation is not high.
The upshot is an unacceptable situation in which firms with physical facilities in a particular state must collect sales taxes from their customers in that state while the burgeoning internet retail sector sells the same and equivalent goods sales effectively tax-free.
Given the dependence of most state governments on sales tax revenue, the de facto tax-free nature of most internet sales is an enormous problem for state budgets, already reeling from the economic effects of the Great Recession. Now it turns out that the modest resurgence of consumer sales in 2009 and, with luck, in 2010 will not produce an equivalent recovery of state sales tax revenues since much of that resurgence is attributable to internet sales on which the states effectively collect little or no sales tax.
The states have been aware of this problem for some time and have been lobbying Congress for federal legislation to require internet and mail order sellers to collect state sales taxes from their customers. As yet, however, Congress has not responded to these entreaties. Recently, several states, in particular New York, Rhode Island and North Carolina, unilaterally enacted so-called “Amazon Laws,” designed to force internet retailers (of which Amazom.com is most prominent) to collect sales taxes by virtue of such retailers’ “associates programs” in those states. However, the efficacy of these laws is doubtful, not least because Amazon.com and other internet sellers can respond to such laws by terminating their associates programs in the states adopting these sales tax collection laws.
Moreover, the fiscal straits of the states are likely to get worse as the Congress and the Obama administration appear determined, as part of federal health care legislation, to impose upon the states new unfunded mandates in the form of expanded Medicaid outlays.
All of these factors indicate that Congress should adopt federal legislation to require internet sellers to collect from their customers state sales taxes. As a matter of tax policy, it makes no sense for the purchase of a book at a local store to be subject to state sales tax while the purchase of that same book online is effectively sales tax-free. Congress should now accept the invitation the Supreme Court extended in its Quill decision and authorize the states to require internet sellers to collect sales taxes from online purchasers.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America.