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Tuesday, April 16, 2013

“Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis

Erika K. Lunder
Legislative Attorney

Carol A. Pettit
Legislative Attorney

As more and more purchases are made over the Internet and states experience more and more fiscal distress, states are looking for new ways to collect taxes for sales generated online. There is a common misperception that states cannot tax Internet sales; however, the reality is that they may impose sales and use taxes on such transactions, even when the retailer is outside of the state. However, if the seller does not have a constitutionally sufficient connection (“nexus”) to the state, then the seller is under no enforceable obligation to collect a use tax. The purchaser, on the other hand, is still generally responsible for paying the use tax, but the rate of compliance is low.

Recent laws, often called “Amazon laws” in reference to the large Internet retailer, represent fresh attempts by the states to capture taxes on Internet sales. States enacting these laws have used two basic approaches. The first is to impose the responsibility for collecting use tax on those retailers who compensate state residents for placing links to the retailer’s website on the state residents’ websites (i.e., online referrals or “click-throughs”). The other is to require remote sellers to provide information about sales and taxes to the state and/or the in-state customers. New York was the first state to enact click-through legislation. Colorado was the first to pass a notification law. These laws have received significant publicity, in part due to questions about whether they impermissibly impose duties on remote sellers who do not have a sufficient nexus to the state.

Under Supreme Court jurisprudence, nexus is required by two provisions of the U.S. Constitution: the Due Process Clause of the Fourteenth Amendment and the Commerce Clause. The Court has held that, under the dormant Commerce Clause, a state may not impose tax collection responsibilities on an out-of-state seller that does not have a physical presence in the state. Importantly, physical presence is only required by the dormant Commerce Clause, which is subject to congressional regulation, while the Fourteenth Amendment imposes a lesser requirement. This means Congress may choose a different standard under its power to regulate interstate commerce, so long as such standard is consistent with due process.

In both the 113
th and 112th Congresses, legislation has been introduced to address the issue of Internet commerce and sales and use taxes. The Main Street Fairness Act (112th Congress) would have authorized states to impose tax collection responsibilities on remote sellers once the act’s requirements relating to state adoption of the multistate Streamlined Sales and Use Tax Agreement (SSUTA) were met. The Marketplace Equity Act of 2011 (112th Congress) would have allowed a state to impose tax collection responsibilities on large remote sellers once it implemented a simplified tax administration system. The Marketplace Fairness Act of 2013 (H.R. 684 and S. 336) represents a hybrid approach in that it would allow a state to impose sales and use tax collection duties on remote sellers if the state (1) was a member under the SSUTA or (2) had adopted minimum simplification requirements, as provided under the act. Similar legislation was introduced in the 112th Congress.

Until Congress decides otherwise, physical presence remains the standard used to determine the constitutionality of states’ “Amazon laws.” Both the Colorado and New York laws have been challenged on constitutional grounds. Colorado’s notification law appears to be the more constitutionally problematic approach—it was recently struck down by a federal district court. So far, the New York click-through law has been upheld.

Date of Report: April 3, 2013
Number of Pages: 16
Order Number: R42629
Price: $29.95

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