No Easy Solutions in the Sales Tax on E-Commerce Debate: Lessons from the Advisory Commission on Electronic Commerce Report to Congress

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I. INTRODUCTION: THE GROWTH OF E-COMMERCE

The Internet Tax Freedom Act1 defines Electronic Commerce (e-commerce) as, "any transaction conducted over the Internet or through Internet access, comprising the sale, lease, license, offer, or delivery of property, goods, services, or information, whether or not for consideration, and includes the provision of Internet access."2 Until recently, the government did not track the growth of e-commerce sales.3 However, in its first official estimate of online retail sales in the spring of 2000, the Department of Commerce estimated that online retail sales4 in the fourth quarter of 1999 were $5.3 billion,

accounting for 0.63% of total retail sales during the fourth quarter of 1999.5 In its second report, the Commerce Department estimated that while total retail sales had decreased between the fourth quarter of 1999 and the first quarter of 2000, the percent of total retail sales accounted for by e-commerce had risen from 0.63% to 0.70%.6 By the time the Commerce Department released its first quarter estimate for 2001, it was estimated that ecommerce retail sales accounted for 0.91% of total retail sales, reflecting a general increase in the share of e-commerce retail sales over the course of the year.7 As ecommerce sales continue to grow, many state and local governments contend that, despite arguments to the contrary, e-commerce sales should not be left untaxed.8

In an effort to help the reader understand the states' position on sales taxation of e-- commerce, this Note explains the core concepts of state and local sales and use taxes and the law governing their application. After the background materials have been set forth, the Note introduces and analyzes the Advisory Commission Report to Congress and three relevant suggestions from its majority proposal.9 In order to add depth to the issues raised in the Commission's proposal, this Note subsequently examines, first, an effort by the states to create a streamlined sales tax system,10 and second, a Senate Bill" introduced after the Commission's Report to Congress was submitted. The analysis leads to the determination that, considering the uncertainty of future e-commerce growth and the impact it will have on state and local revenue collection, and the lack of a consensus-- backed uniform sales tax structure, all parties involved are best served by an extension of the moratorium on state and local sales and use taxation.

II. BACKGROUND

A. The Sales and Use Tax

The sales tax is "a tax on gross receipts from the sale or lease of tangible personal property as well as certain services."12 For example, when a consumer purchases a sweater from a retail store at the local mall, that purchase will be subject to a sales tax (assuming the retail store is located in a state that collects sales taxes). While imposed on consumers, sellers usually collect the sales tax.13 So, when a consumer purchases a

sweater from a retail store, that retail store collects the tax at the time of purchase and remits the collected funds to the proper authority.14

A sale made by a seller not located in the state where the sale was made is subject to a use tax.15 Every state that has a sales tax also has a use tax.16 The use tax is a "tax imposed directly on the consumer by the state in which the purchased property or service is used."17 So, if a consumer in Iowa purchases a sweater from a mail-order retailer based in Delaware, that retailer will collect a use tax for the state of Iowa, so long as the retailer has a sufficient nexus to the state of Iowa.18

The Supreme Court defined nexus in the context of taxation in Quill Corp. v. North Dakota.19 The Quill opinion is discussed in greater detail below,20 but it is relevant now to note that the nexus requirement under the Commerce Clause means a business must have a physical presence within that state in order to be subject to a use tax21 (although the physical presence required is not very substantial). …