By Michael K. McGee
Shoppers have many outlets to choose from when looking to purchase products, one of which is to purchase online. Most websites can undersell your local retail stores because they do not have to charge you sales tax if your residence is not co-located with their store or warehouse. A state can only charge taxes to a customer that resides in that state. Could this be a global form of tax evasion, could states not benefit from its taxation rights due to a technicality? There are many organizations out there right now looking into solving this dilemma and producing an “internet sales tax.” It is very likely that if a universal internet tax is accepted into law, it will result in more of a burden to online retailers and reduce growth of internet use and e-commerce. Moreover, if this tax is implemented, how will this change the future of online shopping? Below I will review some of the facts on shopping online and the impacts of internet taxation.
The first question most consumers may ask is what is the law on internet taxation? The Supreme Court conducted a test to determine if a state tax excessively burdens interstate commerce. The first rule is that a consumer must have nexus (a tie or link to) that state before it can collect taxes from that consumer. “In Quill Corp. v. North Dakota, the Supreme Court explained that a business had to be physically present in a state before that state could require the business to collect use tax on its behalf” (Atkins, 2005, p. 1). In the Quill Corp case, North Dakota sent a notice that the corporation owed taxes for purchases that North Dakota residents had made even though Quill Corp did not have any physical locations or employees in North Dakota. The Supreme Court sided with Quill Corp stating that the taxpayer must have physical presence in the state in order for them to collect a tax on purchases.
Another fact on internet taxation is The 1998 Internet Tax Freedom Act of 2007, signed by President Bill Clinton. What this law did was to make an effort to preserve commercial, educational, and informational potential of the internet. This law prohibits federal, state and local governments from collecting internet only taxes such as the Quill Corp case. The law does not exempt sales taxes from being collected on purchases made online, but rather that online purchases are still taxed as the same as local purchases and mail order purchases. Congress has extended the law three times, was signed by President George Bush in 2007 and is currently good until November 2014. “The online tax moratorium doesn’t apply to regular sales tax, however. A 1992 U.S. Supreme Court decision held that companies with no actual physical presences in a particular state — a store at the local mall, or a regional distribution center for example – were not required to charge sales tax for items they ship to that state” (Fuller, 2011, p. 1). What this meant was that if you buy something online and the retailer doesn’t charge sales tax, you the consumer are supposed to send the tax to the appropriate authorities.
The last fact is the movement to simplify tax collection of online companies that do not have nexus presence in a state. The movement, also called the Streamlined Sales and Use Tax Agreement (SST), is trying to reduce the administrative costs of collecting taxes. “Even though the SST movement began with the worthy goal of simplification, over the years it has been overtaken by revenue-hungry tax administrators, politicians and interest groups — all too excited to continue their never-ending quest for more state tax revenue” (Williams & Stephenson, 2011, p. 2). The SST has been struggled to overturn the Quill Corp decision and has been generally unsuccessful in swaying state and Congress to approve new legislation.
In conclusion, more and more consumers are turning to online shopping not just for the ease of finding hard to find products and locating a great deal, but in order to avoid being charged taxes because of the nexus rule. This has been legally acceptable from looking at the Quill Corp. v. North Dakota, the 1998 Internet Tax Freedom Act of 2007. Until the greedy politicians have a chance to change the laws governing internet use and business, buying online to avoid paying state taxes is not a form of tax evasion. The opposition to this is the movement of the SST to enable states to charge taxes to consumers that are not nexus located to the retailer. Many opposed to internet taxation are convinced that an increase in tax and fees will result in more expenses for the consumer and will ultimately restrict the growth of internet use and e-commerce (Griffin, Smith, and Watson, 2009). Most Americans would agree that every state has a right to collect a form of sales tax that will help benefit their state, but in the end if an internet tax rate such as the SST is trying to pursue would primarily hurt the small business that are trying to conduct sales online.