By Dotson, Betsy
Government Finance Review , Vol. 12, No. 4
For many years, state and local governments have been unable to compel the collection of sales and use taxes legally owed on merchandise shipped to consumers in their jurisdictions by out-of-state companies. The most recent figures provided by the U.S. Advisory Commission on Intergovernmental Relations (ACIR), issued in late 1994, estimate the total state and local sales and use tax revenue from mail-order sales to be $4.5 billion. Allowing for the estimated tax payments already being made, ACIR estimated lost revenue for 1994 at approximately $3.3 billion. While five states have no sales tax, ACIR estimates that nine states would receive more than $100 million each in additional revenue.
In 1967, the United States Supreme Court issued a decision in National Bellas Hess, Inc. v. Illinois Department of Revenue holding that state sales or use taxes may not be imposed on a seller whose only connection with that state was by mail or common carrier and who had no physical presence, or nexus, in that state. In its later decision in Quill Corporation, Inc. v. North Dakota (1992), the Court ruled that Congress could overturn the nexus provision and allow states to require the collection and remittance of payment. Despite several attempts, legislative efforts in this area have been unsuccessful.
Many customers of mail-order sales companies are unaware that, despite noncollection by mail-order firms, they nevertheless owe a tax on merchandise purchased from these firms equivalent to the sales tax they would have paid had they purchased the merchandise in state (the use tax). Because direct marketing companies are not required to collect sales and use taxes on these purchases, it is the consumers' obligation to remit the tax on their purchases to their state or local revenue agency. Many consumers are shocked to receive a bill for the tax, along with penalties and interest. The reason for this confusion lies with the advertisements and order forms produced by out-of-state mail order companies. Some advertise that the purchase is tax free, some indicate that tax need only be calculated for specific listed states, some are silent on the issue of tax, and some comply by listing the tax due for all states with sales taxes. The magnitude of the problem has increased as well, because no longer are products promoted only by catalog. With the advent and widespread use of the Internet and television shopping networks, more sales information than ever is reaching distant purchasers. (For a discussion of electronic commerce, see the article on page 36 of this issue.)
While state and local governments have felt the direct effects of lost revenue, as demonstrated by their commensurate reduction in services provided to citizens, they also have been concerned about the effects on their citizens who are belatedly charged use tax and the effects on their local businesses which must compete with mail-order sales companies for sales.
Involvement of the FTC
In response to these concerns, as put forth by a broad coalition of state and local government organizations and retailers, six U.S. Senators in October 1994 requested that the Federal Trade Commission (FTC) investigate mail-order sales firms' practices which mislead consumers about their use tax obligation. The FTC is an independent agency charged with the enforcement of federal antitrust and consumer protection laws. Its efforts are directed toward stopping actions that threaten consumers' opportunities to exercise informed choices, including eliminating acts or prices that are unfair or deceptive.
The letter to the FTC - signed by Senators Dale Bumpers (D-AR), Kent Conrad (D-ND), Bob Graham (D-FL), Byron Dorgan (D-ND), Harlan Mathews (D-TN) and Daniel Inouye (D-HI) - outlined the two primary concerns shared by state and local governments. The senators pointed out that consumers are injured and inconvenienced when a state agency is forced to assess a mail-order customer for the use tax and associated charges as required by law. …