Laws and Taxation of Internet Sales: Constitutional Analysis

As more purchases are made over the Internet, states are looking for new ways to collect taxes on online sales. There is a common misperception that the U. Constitution prohibits states from taxing Internet sales. This report discusses "Amazon laws", which try to capture uncollected taxes on Internet sales and yet still comply with the Constitution's requirements. This report is part of the collection entitled: It has been viewed 33 times. More information about this report can be viewed below. People and organizations associated with either the creation of this report or its content.

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What responsibilities do I have when using this report? Dates and time periods associated with this report. Geographical information about where this report originated or about its content. Constitutional Analysis , report , November 28, ; Washington D. Description As more purchases are made over the Internet, states are looking for new ways to collect taxes on online sales. Physical Description 12 pages.

Some people say "Ah no, it's based on where the transaction takes place", which may or may not be the original impetus, but I don't care: I'm not a lawyer, quibbly or otherwise. The only sane and simple rule is that all purchases should be taxed based on the seller's location. Then people ask "So where is Amazon?

What I want is a simplicity.

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It is utterly ridiculous that Amazon is responsible for calculating tax in thousands of jurisdictions, taking care to be aware of tax holidays, different ideas of what constitutes school supplies, or the difference between snacks and food. I also want states to have to compete for businesses. I want Amazon to be able to say, "Hey, you are raising the sales tax too much, we are going to reincorporate elsewhere", and I want states to be paranoid about losing business when they do stupid things.

Doesn't harm their residents. Would effectively end small retailers selling out of state. And business would either raise holy hell for all the customers they lost, or remain local, or move out of state, or go out of business. Harry M Johnston 1. Wouldn't that defeat the purpose of having a sales tax rather than just increasing company taxes?

But if it's simplicity you want, let me recommend GST: No tax holidays, no need to decide what constitutes a school supply or a snack. I'm no expert, but as far as I can tell it has worked well here in New Zealand. EU VAT taxes are complicated by all sorts of categories. Last I saw, they had around a hundred categories school supplies, agricultural equipment, The base problem is that governments create a zillion varieties of taxes to hide the fact that they just want more money, to try to dress taxes up as nudging behavior in some way, to make it seem more moral than a pure money grab.

If governments were honest about that, or if the populace wouldn't let them get away with pretending that taxes are a question of morality nudges, then maybe they wouldn't have all these intricate special cases and carve-outs for their cronies. If I remember correctly, way back when GST was first introduced here one of the reasons given for a flat rate was indeed to avoid the sort of mess that VAT had created in the EU. Actually, I live in Alaska which does not have a state-level sales tax , when I travel to Washington I can buy goods destined for use at home without paying sales tax, and I do show ID for that.

And my family owns a small retail store, if an out-of-town buyer is willing to jump through some hoops mostly requires removal of the goods via common carrier the borough sales tax is not applied. I don't think that's such a good solution, since you continue to burden brick-and-mortar stores in the high-sales-tax jurisdictions soon to be the any-sales-tax jurisdiction, as Amazon shifts its corporate headquarters to the first place to totally abolish sales taxes.

If you want to choke off all commerce there, I think you should just come out and say so. Meanwhile, I don't think sales tax should be uniquely disfavored above other forms of taxation. This is critical for small businesses on both sides and for consumers. Every piece of complexity enables giants like amazon and inhibits the small guys. Would there be constitutional or practical issues with requiring, e. That would cover international sales as well as inter-state sales, which seems like a potential weakness in your proposal - one we struggle with here in New Zealand. But I believe there are a number of other advantages to GST, e.

You'd have to also charge tax whenever someone puts money into, e. That might cause problems.

Similarly, why not have the Federal government collect the funds for each State separately rather than a single pot? I mean, I see that adds some additional burden on the retailer, but we're talking internet sales here - the computers can handle adding fifty-something different taxes easily enough, so long as they're all flat rates. Okay, fifty, with a simple lookup table based on the state appearing in the mailing address, is fine.

Both vendors and customers are global, not national. Using the same logic you already did, the solution can't be statewide, nor country wide, it must be global. I'm sorry but the Idaho home phone case vendor argument is a crock. If she's selling that much, she can bleeping well figure out how to collect the tax. Other states have similar thresholds. I also happen to agree that it would be a good idea to come up with streamlined interstate tax collection, but guess what, they're working on that, too. Its not that she cannot "figure out" the tax, its all the paperwork that goes with it that sucks up her time.

Maybe that's the case for South Dakota, but once you open this up, I promise you the threshold will inch its way down. I actually have two legal journal publications on this issue. In one, I addressed trucking companies which must pay taxes in states where they have a certain minimum presence. I figured out that if you wanted to ship between, say Massachusetts and Pennsylvania, you'd need to go through New York at some point.

If you took the shortest distance and made the minimum number of entries, you could travel all of about miles and be forced to pay several hundred dollars in a franchise tax. I became interested in the issue when a client, a trucking company, had its truck stopped in New Jersey or some other nearby state.

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The trooper asked how many times the driver had entered the state. It was something like a dozen times. The trooper than held the truck and refused to release it until the company a small family operation paid several years of back franchise taxes and penalties. It was several thousand dollars, all because the truck entered the state a handful of times. But it's not a crock. Every State will have its own exemptions, its own exceptions, its own thresholds, its own reporting requirements "Reports are due on the 1st Thursday after the 3rd Wednesday of every month, unless it's a leap year, in which case Whether she is or isn't subject to SD tax isn't the question - the question is how will you know whether you're subject to the taxes levied in each of the many thousands of jurisdictions.

Dew for the road, can South Carolina tax me on it when I enter the state? I'm pretty sure that the answer to that is "no"; They'd be taxing interstate commerce. By that reasoning, I don't see how South Carolina can charge a tax on online purchases where the item originates out of state. It's not really different enough from me going there to pick it up; The states can't tax interstate commerce.

I don't know about South Carolina, but according to the letter of the instructions on the North Carolina use tax form, North Carolina says you'd need to pay them tax in the reverse situation if you were a North Carolina resident. Yes, and you'll notice just how much effort they devote to enforcing that provision of the tax law, too. Lots of laws that would go down if ever challenged hang around just because the government takes care not to try to enforce them. I agree with Justice Thomas that there is no negative commerce clause. There is only a grant of power to Congress.

If Congress thinks the various doctrines the Supreme Court has promulgated over the years are good policy, it can simply enact them into law. Centralization has risks as well as benefits. If all the hamburger in the US were slaughtered in one central slaughterhouse and chopped and mixed in one giant vat, the price might be cheaper, but any mishap - disease outbreak, mechanical breakdown, fire, flood, etc.

It is solely for Congress to weigh the benefits against the risks and say when centralization is a net good for the country, and when localization and local barriers represent better policy.

"One sane voice fighting tons of nonsense."

It isn't the Courts' business. That said, I think there's an argument, under current doctrine, that accounting and computer advances make accounting for taxes in multiple jurisdictions less burdensome today than it was in And it's also possible could impose limits or restrictions, for example, requiring that states collecting taxes from out of state businesses have to permit them to respond to audits etc.

Similar limitations might address other concerns. This is not hypothetical or trivial.

"Amazon Laws" and Taxation of Internet Sales: Constitutional Analysis - Digital Library

New Hampshire does not have a state sales tax; Massachusetts does. Both states are geographically small. New Hampshire has malls and liquor outlets located just over the MA border on interstate highways. It is exceedingly clear that they are placed there to take advantage of Massachusetts' sales tax and the residents of the Commonwealth who would like to avoid it.

On an intuitive level, it seems wrong to say that MA could reach into NH and require those NH businesses to collect sales and remit sales taxes on MA residents. It would also be onerous to require that everyone checking out of ThinkGeek at the Rockingham Mall to provide a ZIP code and for the cashier to have to hand-calculate the tax, rather than having one uniform tax based on the location of sale.

I'm surprised the Supreme Court took this case.

Leave the status quo alone, and if there is a serious enough problem with it, then Congress can fix it. I don't agree with the idea that the Supreme Court needs to do the job of Congress because Congress is "disfunctional. State 'use' taxes apply not only to goods purchased in or from other states, but to goods purchased abroad.

I have always wondered, and perhaps someone could tell me, why a Michigan tax on goods purchased in say London or Paris is not tantamount to a tariff, and why that does not violate both the dormant commerce clause and the prohibition of non-uniform "Duties, Imposts and Excises. Your proposal leaves rather perverse incentives. Currently there are states with higher and lower sales taxes, and even states with no sales tax at all. Nationally taxing at some sort of weighted average tax rates and paying in proportion to tax rates says "Every state except the one with the highest sales tax is a sucker.

The "problem" you identify isn't actually unfair at all relative to any other possibility. Yes, the brick-and-mortar-store is disadvantaged-- by choosing to live in a jurisdiction with a high sales tax. A jurisdiction they get to vote in, and foot vote out of, and get whatever services those sales taxes are paying for in. Far be it from me to say that that makes the taxation acceptable, but it certainly doesn't mean that some other person who doesn't get those things should be bearing the burden for them.

If you buy everything online, you're avoiding the tax but still receiving the services the tax is paying for. Whether or not that is fair is arguably a matter of opinion, but it certainly creates unfortunate incentives. The local stores and their owners ARE receiving the services those sales taxes are paying for. They, and their owner, live there. According to the theory of people who advocate sales taxes and most other taxes , the services they pay for go to the residents of the taxed jurisdiction. To put that another way: Mind you, whether that's really a major problem depends on just how much business he's losing, which may be hard to accurately measure.

That said, does my earlier proposal address your concerns? Another option that would make more sense than this proposed scheme is that the states can simply come up with another way to collect taxes besides drafting businesses to collect sales taxes for them keeping in mind that the tax is technically on the purchaser and the merchant is simply collecting the tax on behalf of the government. I think if you asked an economist they'd say that coming up with "another way to collect taxes" isn't all that simple.

I can't say from my own knowledge whether sales taxes really do produce better economic results compared to other sorts of taxes, but I've seen it asserted that they do. I get the feeling the average small business owner receives state services somewhat out of proportion to their personal sales tax.

They receive both state services as an individual, and as a business in that they can call the cops on shoplifters and the like. Granted, there are also licensing fees and such, and who knows how all that balances out no one btw, it's impossible to determine a really really fair price for services that aren't subject to market pressures from people being free to simply not buy it if it isn't worth it , but considered in isolation the sales tax costing them more doesn't seem patently unfair.



Your earlier proposal still leaves it to the discretion of states what they demand, and hence they are incentivized to demand the highest. On the other hand, I have no particular objection other than my general objection to all taxation to a federal rule that says "the general sales tax rate that applies to normal brick-and mortar transaction within the consumer's state apply's to that consumer's online purchases between and enforcement is between the consumer and the state. That way, there's no substantive burden on the seller that they can't foot vote their way out of, it's all on the consumer who has both foot voting and normal voting power.

Or "States must apply their general sales tax rates to transactions made by sellers within their states--" that just makes it normal everyday tax competition between states, just like when we Washingtonians head down to an Oregon auto dealership to avoid sales tax, and hence also stays internalized for the purposes of foot voting. The states are imposing only the burden of knowing one sales tax withholding regime on their online sellers, the same as their brick and mortar one, and hence the costs are all internalized enough here too for foot voting and normal voting to work at their normal levels of functionality.

The states, if they want to be fully libertarian about the issue, remain free to not have a sales tax regime at all and hence foot voting remains free to choose such states if they choose to exist. I still have the general objection that all taxation is evil of course. Call my two alternative proposals here a "federal consumer's nondiscriminatory rate" and a "federal seller's nondiscriminatory rate" approach.

It's not an average, and it's not whatever the state's say, it's whatever the states actually charge to their general brick and mortar stores, either we have a reporting requirement to enable them to enforce it on their consumers, or they are required to enforce it on their sellers, in either case being forbidden to give online sellers a different rate from their general applicable sales tax.

Of course, states make all sorts of brick and mortar exemptions to their generally applicable sales tax, so they would still have an effective means to discriminate, but at least they'd have to go the long way around their protectionism. If the state you live in implemented an excessively high internet sales tax, you'd be free to both vote against it and to move to another state.

So I don't think that's any more of a problem than with any other tax. The idea that an internet sales tax might be used as a sort of excise tax for inter-state protectionism is an interesting one. I wouldn't have thought that would be a problem - are the states really that hostile to one another?

I don't think it's a huge problem, though; you could require Congress to approve both the initial rates and any changes, or give the job to whatever federal agency you think best. The two obvious problems with the state a business is located in charging that business a tax on out-of-state sales are a if you do that it isn't really a sales tax any more, i.

Granted I don't imagine you care about a and would probably welcome b I'm taking the Devil's Advocate position here, so to speak, and arguing from the perspective of the state government which does after all need to fund itself somehow. The arguments you level against "race to the top" concerns are also applicable to "race to the bottom" concerns, but in practice, when a race to the bottom is incentivized, it still happens.

So, in practice, when a race to the top is incentivized by the rules, it will still happen, regardless of the in practice, probably useless due to lack of coordination votes possessed by internet consumers. You are correct that I have no objection whatsoever to a race to the bottom, and consequently am absolutely shit-my-pants-terrified at any possibility of a race to the top. If you "tax the business" it is reflected in consumer prices.

What matters, economically, is what sort of transactions incur tax liability, not in which party to the transaction that tax liability is incurred. Yes, states are hostile to each other. That's why congress is so dysfunctional. Hundreds of state-elected legislators all fighting each other for pork. Giving the job to Congress is hence not a solution at all, and giving it to a federal executive agency is going back to that "average" solution that gets rid of tax competition, foot voting effects, ballot effects, etc.

I don't think the two taxes are economically identical, since the business incentives "where shall I site my business" as well as the consumer incentives "which business shall I buy from" are different. I'm also not clear on why you think state sales taxes would "race to the top" any more so than, say, state income taxes?

State income taxes have at least some race to the bottom effect because people move away from the states with the highest income taxes. This doesn't affect internet retailers, who are under the proposal subject to taxes from a place they don't live anyway. That's about an 8. That's about a Yeah, I'm plotting to put local brick and mortar shops out of business by making internet purchases to avoid sales tax by paying nearly twice as much for shipping and handling, because my conspiracy to put brick and mortar shops out of business is that nefarious, Mawahahahaha!

He put the central issue this way: Unfortunately, large Federal grants to states are already making that the case to some extent. I shudder to think what the lack of tax competition would do to the rates of taxation.