Legal Bytes: Internet Sales Tax -- Revisited

        by John Brewer    February 2005

      

    Some are wondering about the issue of taxing sales on the Internet? The controversy that surrounds this topic has not disappeared; it is simply simmering on the back burner.
    The federal law regarding Internet taxes expired on November 1, 2003. The issue receded into limbo after that date. On December 3, 2004, President Bush signed new legislation regarding this issue.
    The Internet Tax Non-Discrimination Act passed by the House of Representatives in 2003 would have made the ban permanent. But the version adopted by the Senate and signed by President Bush on December 3 limits the ban to 3 years. The final version clarifies that the ban applies to all Internet access whether provided over telephone, cable or DSL. It also prohibits telephone companies from avoiding state taxes on long distances services when the long distance traffic is provided as Voice over Internet Protocol. States that have been charging sales taxes on Internet services (some prior to the original federal ban in 1998) can continue to charge them for 4 more years under this legislation. This new law does not alter the current ban on state sales tax collection for online sales of goods.
    The Commerce clause in the U.S. Constitution, as interpreted by the U.S. Supreme Court, limits the ability of State governments to impose sales tax on interstate commerce. The exception occurs when the selling vendor has a physical presence in the State where the purchaser resides. This physical presence is called “nexus.” Thus Wal-Mart (with a nexus practically everywhere) has to collect sales tax and remit it to the revenue division of the State where the purchaser resides (point of delivery). Amazon with a physical presence in only a handful of States only has to collect sales tax for sales delivered to those States.
    This duty of the vendor to collect sales tax does not avoid the responsibility for the purchaser to pay the tax in his/her home State. The tax that is imposed by the home State is generally called a “use” tax. However, enforcement of the use tax is difficult and few individuals pay the tax. Payment by commercial customers is more frequent.
    It is reported that there are 7,500 different sales taxing formulas that exist within the United States. No other country relies on the sales tax to fund local and State governments to the degree that exists within the United States. Generally, the sale tax is imposed on the sale of goods although, in some States, the sale of certain services is also included.
    In order to plug this hole in the revenue stream, the National Governor’s Association has been diligently working towards a solution that would satisfy the requirements of the U.S. Constitution. This solution is called the Streamlined Sales Tax Project (SSTP). It sounds like a project by Boeing but it is far from that.
    The SSTP is a multi-state effort to develop a simplified sales tax collection system for all types of commerce, including Internet and traditional transactions. Most businesses and taxpayers responsible for sales and use taxes will be affected by this effort, which has been underway since March of 2000. More and more state tax authorities are beginning to enact provisions proposed by the project. The provisions will affect all types of businesses and all modes of selling.
    According to reports, as of August 1, 2004, twenty-one States had enacted legislation that substantially conforms to the SSTP (although reports seem to differ on the exact number). However, collection of sales tax by vendors in those States is still voluntary. The SSTP does not mandate that a vendor in a SSTP-implementing State must collect sales tax on an interstate sale.
    Thus, the focus is on Congress and how it will respond to the SSTP initiative. There is legislation pending in Congress that will implement the SSTP.
    Senators Byron Dorgan (D-SD) and Michael Enzi (R-WY) introduced legislation in 2003 titled the “Streamlined Sales and Use Tax Act,” that would authorize States to enter into an Interstate Sales Tax Compact and to adopt a streamlined sales tax system; i.e., Senate Bill 1736. There is a companion bill in the House of Representatives. The House bill is H.R. 3184. The languages of the Senate and House bills are identical. The sponsors for the House bill are Ernest Istook (R-OK) and William Delahunt (D-MA). It is important to note that the sponsors are bi-partisan.
    Once 10 states representing at least 20 percent of the population in States with sales taxes have joined the Compact, the bill would authorize those states to require companies with more than $5 million in annual gross sales to collect and remit sales taxes on remote sales (i.e., Internet and mail order sales).
    Authority of interstate compacts is found in the U.S. Constitution, Article I, Section 10. Section 10 allows states to form interstate compacts, provided they are approved in identical form by each state involved and then by Congress. Compacts enable participating states to enact policies in a particular area (such as tax collection from out-of-state companies) that would otherwise violate the Constitution's interstate commerce clause. The Northeast Interstate Dairy Compact is one example.
    This debate has not gone away and is slowly progressing to some sort of resolution. It will be interesting to see the end result.
 

 

John Brewer practices law in Oklahoma City, is a member of the Governor’s and Legislative Task Force for E-Commerce, and enjoys issues relating to eBusiness and cyberspace.  Comments and questions are welcome and can be emailed to

Johnb@jnbrewer.com.

 

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