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The Lesson of the 2009 Holiday Shopping Season:
Tax Internet Sales

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.

Recent Comments

  1. R. David L. Campbell

    Nice post. Hopefully the revised Main Street Fairness Act will be soon introduced before congress to address this very issue.

    We agree completely that the so-called “Affiliate Taxes” are an unequal and innapropriate mechanism for taxation (which we have detailed on our blog at http://blog.fed-tax.net/2009/07/20/complexnexus/). A significant concern surrounding such legislation is that it could be interpreted to include any direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus.

    The Main Street Fairness Act will finally mature efforts which has been underway for the last ten years called the Streamlined Sales and Use Tax Agreement (or SSUTA). SSUTA has been developed collectively by 44 states, along with industry groups and retailers, in an effort to simplify and modernize state-by-state sales tax codes to eliminate the overly burdensome “entanglements” cited by the US Supreme Court opinions from 1967 (Bellas Hess) and again in 1992 (Quill). Complete details about SSUTA are available at their website, http://www.streamlinedsalestax.org.

    We maintain that with basic application of modern technology with SSUTA simplified rules and procedures, systems within e-commerce websites could easily calculate (and collect, and remit) accurate local destination-based sales tax, using techniques akin to real-time shipping calculation – a feature frequently a part of most modern web purchasing experiences today.

    Thank you again for your thoughtfully considered post, and we look forward to the day when ALL merchants are collecting and remitting local sales tax.

    R. David L. Campbell
    Chief Executive
    The Federal Tax Authority (Fed-Tax.net)

  2. […] Oxford University Press Blog Post Edward Zelinsky posted a well-written and concise article on the Oxford University Press Blog today detailing why Congress should adopt federal legislation […]

  3. R. David L. Campbell

    Mis-typed the URL to our blog post related to “Affiliate Taxes.” Please use this one ( http://wp.me/pvXY8-1b ).

    R. David L. Campbell
    Chief Executive
    The Federal Tax Authority (http://Fed-Tax.net)

  4. R. David L. Campbell

    Wow – it would seem that with this blog system ANY character next to a URL is automatically included in the URL. The correct URL for our company is http://fed-tax.net

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  9. Online Shopping

    Many consumers are finding online shopping quite convenient and easy. More than anything else its the ease with which we can compare features and prices and can make best buying decision on the internet

  10. DF

    This is a typical, yet simpleton, argument for an online sales tax, which shows no regard whatsoever for the logistical nightmare that is inherent with any of the proposed tax ideas that have been discussed at the state and federal level.

    Look, simply saying “it’s not fair” doesn’t make this an open and shut case. Consumers have benefitted from the absence of an online sales tax but is that REALLY so horrible given the dire straits many are in over the past few years due to bad economic policy and decision-making by govermnment leaders?

    Fact: every idea to date that has sought to add an internet sales tax has been more trouble than it is worth. In New York, their solution was to force retailers themselves to find a way to collect the sales tax from online transactions, and the burden and cost of collection itself was to be put on those retailers as well. Basically, the lawmakers in Albany want your tax revenue, they just don’t want to do anything themselves to collect it. How is that a sensible solution?

    An online sales tax may or may not be a good idea but implementing one simply for the sake of fairness, without really delving into the cause and effect, is stupid.

  11. R. David L. Campbell

    Our “simpleton” argument that local sales taxes should be collected by ALL merchants is based upon our knowledge and ability to completely address “the logistical nightmare” which has accompanied this issue in the past.

    Our TaxCloud sales tax-as-a-service, which will be available later this year, will be offered at no charge to merchants, to facilitate collection and compliance.

    Our TaxCloud service (currently undergoing state-by-state certification under the SSUTA) automatically calculates and remits state, regional, local, and special jurisdictional taxes (again at zero cost to merchants). Also per the SSUTA, TaxCloud automatically manages exemptions (entity-based, item-based, and calendar-based), and also prepares Simplified Electronic Returns to each taxing jurisdiction. We are working toward implementing TaxCloud for all SSUTA and non-SSUTA states alike (except, of course, the states that do not collect sales tax).

    We are building TaxCloud because we firmly believe that our local communities deserve the funds which were anticipated when voters approved their respective local initiatives for public services and projects. We also know that a well designed and implemented web service could be easily integrated with existing online “shopping cart” software and point-of-sale systems.

    You can see a preliminary demonstration of TaxCloud calculating tax rates for thousands of state and local tax jurisdictions at http://myrate.taxcloud.net . As states, counties or transportation districts update their rates, TaxCloud and all TaxCloud merchants get the change automatically, and maintain compliance with all local sales tax laws.

    It is time to tell ALL Internet merchants (not just Amazon.com) to start collecting and remitting local sales tax, just like the corner store has to. Stop pretending that the transaction is “tax-free” because Use tax is still due.

    Your local sales tax should be collected & remitted for you by all merchants, so businesses and individuals don’t have to meticulously keep track of all out-of-state transactions.

    R. David L. Campbell
    Chief Executive
    The Federal Tax Authority ( http://Fed-Tax.net )

  12. KLP

    …or, states could just repeal their sales taxes.

  13. John Beck Tele Seminar

    Many consumers are finding online shopping quite convenient and easy. More than anything else its the ease with which we can compare features and prices and can make best buying decision on the internet

  14. Jackie

    I agree that the internet should be taxed fairly, but what about very small business that sell online? For example I sell books through Amazon, they go all over the country, how would I calculate sales tax for each state? Would I be sending $3.48 to California, $10.22 to New York and so on? It would be a nightmare!! What if the internet was taxed at one low rate and then the money was divided fairly among the states? This would simplify things, but still generate revenue.

  15. Austrian Mind

    Oh yes, poor poor government not getting its blood money. Everyday people are able to quickly and convieniently browse the entire world for the best product and at reduced cost–What a tragedy! Oh cruel misfortune! How dare free people enjoy such free and bountiful commerce!

    Notice how you did not once consider how tax-free and low overhead of internet business is a massive boom to citizens and merchants alike. Instead, you bemoan the injustice that wealth cannot be syphoned away to feed bloated goverment welfare and warfare.
    You are a a statist shill, Mr. Zelinsky. May your collar never chafe.

  16. ALC

    Great idea! Lets make everyone enforce the most regressive tax. If the states want money have them raise their income taxes. That way we will really know what they cost.

  17. […] friends at the Oxford University Press argue that states hands are tied in collecting e commerce sales tax. Most webstores do not establish nexus in all states they operate and therefore their online […]

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