Laws and proposed laws for the taxation of internet transaction meet conflicting interests among several different parties, including the states, large and small online retailers, and brick-and-mortar retailers. Less vocal parties also affected by internet tax policy include the federal government, domestic consumers, and foreign online retailers seeking to export goods to the United States.
To that end, laws seeking to impose taxes on internet purchases made by consumers from out-of-state online retailers arise from two concerns:
First, most states experience reduced tax revenues because taxes are not collected by out-of-state online retailers selling to in-state consumers. The tax may nevertheless be due and reportable on the consumers’ state tax returns, but since few consumers report these taxes, the state does not receive the revenue.
Second, brick-and-mortar stores favor strict enforcement of sales taxes against internet retailers in order to compete fairly with out-of-state online retailers. Brick-and-mortar stores claim they are unfairly and inefficiently disadvantaged when online retailers are not subjected to equal sales tax obligations and/or when those obligations are effectively unenforceable. The brick-and-mortar stores claim that insufficient or unenforceable taxation of internet transactions is unfair both because it prevents them from offering competitive pricing and also because that price inequity encourages consumers to drain the resources of brick-and-mortar stores in order to view products that they plan to buy at an online retailer.
Online retailers oppose expanded taxation of internet transactions, however, arguing that such taxes would unfairly and inefficiently disadvantage themselves. For example, business would be inefficiently impeded if those retailers were subjected to tax audits in 50 states rather than only in those states where they had physical operations or if they had to keep up with and administer countless state and local tax regimes. To that end, online retailers characterize such fears not only as policy concerns but also as constitutional deficiencies in the taxation of internet transactions.
Those constitutional issues at play are illustrated by Amazon’s case against New York’s tax law, described next.
New York attempted to resolve these competing interests by passing a tax law which placed a rebuttable presumption of jurisdiction on online retailers who contract with in-state parties to market their products. Amazon challenged the New York law as unconstitutional under the Commerce Clause, the Due Process Clause, and the Equal Protection Clause. Before the New York Court of Appeals, Amazon did not argue that the state law was unconstitutional as applied to Amazon but argued, instead, only that it was unconstitutional on its face.
Separate from state solutions to the problem of taxing internet transactions, Congress is currently considering bipartisan legislation to establish uniformity and enforceability of such taxation. Familiarize yourself with the Marketplace Fairness Act by accessing the following resources:
Keep in mind that the Marketplace Fairness Act has evoked discussion primarily among the equity of taxation among different states and between large online retailers (likely to be captured by a law such as New York’s as opposed to small online retailers).
Before considering the following questions, read Internet Taxation and Principles of Good Tax Policy by Annette Nellen. Then, consider the following:
I will propose the following as a thought experiment to enhance our discussion of the above proposals: Many, perhaps most, of the constitutional and policy concerns raised over all proposals discussed in this assignment would be eliminated if competing state sales taxes on internet transactions were replaced by a federal sales tax. In order not to infringe on the state’s right to tax its own citizens, the federal sales tax could be creditable to an online retailer if a comparable state sales tax is paid instead.
Enforcement at the federal level would resolve multiple concerns, including the following: (1) That businesses might be subjected to taxes for which no jurisdiction to tax exists. (2) That businesses might become confused by needing to keep up to date with too many state and local tax regimes. (3) That businesses might be forced to expend excessive resources complying with tax audits in too many jurisdictions.
However, such a federal scheme would likely coerce states to enact state sales tax laws matching the federal tax rate, which would increase sales tax rates above their current levels in some states and establish sales taxes in states that do not currently have them. This may or may not be concerning to you.