Taxing Internet Sales

The Senate, by a vote of 69-27, passed S. 336, the Marketplace Fairness Act of 2013, a bill designed to restore States’ sovereign rights to enforce State and local sales and use tax laws. The legislation seeks to reverse the decision of Quill Corp. v. North Dakota, 504 US 298  (1992) in which the Supreme Court ruled that States cannot require a retailer to collect sales taxes on its behalf, unless that retailer has a physical presence in the taxing state.  The Marketplace Fairness Act eliminates the Quill standard and would allow States that meet certain minimal standards to require retailers in all States to collect taxes for them.

The bill's aim to enforce a sales tax on businesses that rely on the Internet to reach their customers has three problems: 1) Online businesses would be responsible for collecting and filing their sales tax from customers that do not reside in their state; 2) Businesses would need to use software to keep track of their tax paying customers putting their customers at risk by exposing sensitive information records; and 3) Requiring that sales tax be collected at the state from which the goods are shipped would be much simpler and would encourage states to be less reliant on highly regressive sales taxes.

The BLS Library has in its internet collection a report from the Congressional Research Service “Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis which examines efforts by States to tax internet sales. According to the report, New York was one of the first to do so. On March 28, 2013, the New York Court of Appeals found New York’s Amazon tax constitutional in Amazon.com, LLC v. New York State Department of Taxation and Finance. That decision is important because, since New York enacted Tax Law §1101(b)(8)(vi) in 2008, eight other states have passed similar laws.

Brooklyn Law School Professor Brad Borden took part in a podcast with the Voice of Russia about the legislation that require retailers with more than $1 million a year in online sales to send taxes to states where their products are delivered. Large retailers and smaller stores support the bill, but online retailers such as eBay oppose it. According to Borden: “With Internet sales rising, constituents and business owners in various states are putting pressure on lawmakers to help even the playing field.”