Online Retailers Battle with Sales Tax: A Physical Rule Living in a Digital World

By Patch, Emily L. | Suffolk University Law Review, Spring 2013 | Go to article overview

Online Retailers Battle with Sales Tax: A Physical Rule Living in a Digital World


Patch, Emily L., Suffolk University Law Review


"In addition to 24/7 accessibility, doorstep delivery, immensely wider choices, and the ability to compare both availability and price in an instant, another perk of e-commerce--at least for some--has been the lack of any sales tax added to purchases. But hang on to your wallet, because that's about to change." (1)

I. INTRODUCTION

Next time you go shopping, look at the sales price of an item you want to buy. Compare that price with the somewhat higher price you actually end up paying. That difference is what we all know as a sales tax. (2) Now, sign on to amazon.com (Amazon) and look up the exact same item. (3) You will likely notice that the online price is lower than it would otherwise be in a brick-and-mortar store. (4) You will also notice that unless you are in one of the nine states in which Amazon must charge a sales tax, the final sale price is the same as the ticket price. (5)

Although seemingly unfair, this difference in price between the local brick-and-mortar store and the pure-play online retailer is consistent with the 1992 Supreme Court holding in Quill Corp. v. North Dakota. (6) In Quill Corp., the Court held that a state has taxing authority over an out-of-state retailer only when that retailer has a "physical presence" within the taxing state. (7) Despite the immense expansion of both the Internet and electronic commerce (ecommerce), the 1992 case continues to control today. (8) Consequently, cash-strapped states have become more invested in seeking alternatives that would require out-of-state retailers to charge their in-state consumers a sales tax at the time of purchase. (9)

In 2008, New York passed state legislation (Amazon Law) requiring all out-of-state retailers making over $10,000 in revenue who employed affiliates within the state to collect and remit sales tax. (10) Despite a number of states attempting to follow New York's lead, to date New York is the only state that has successfully passed legislation and yet continues to house Amazon affiliates. (11) Other states that have attempted similar legislation either succeeded in legislation but drove Amazon to withdraw its affiliate program in the state, or postponed legislation in exchange for a deal with Amazon. (12)

The issue of sales tax as it pertains to out-of-state retailers is not a new one. (13) Not surprisingly, it has come to the forefront in recent years as states cope with the economic downturn and a drastic reduction in state revenues. (14) While individual state legislation appears to be the only response, it is at best a partial solution. (15)

In Part II.A, this Note discusses the evolution of e-commerce, from its inception in 1994 to the present day. (16) Part II.B examines the history of Amazon--from its modest beginning in a Seattle garage to its current and consistent position as one of the world's top online retailers. (17) Part II.C discusses states' sales-tax jurisdiction, focusing on relevant case law and how Amazon currently charges sales tax to its customers. (18) Next, Part II.D discusses the states' responses to large online retailers' avoidance of sales tax. (19) Part II.E then discusses proposed federal legislation, focusing on the Streamlined Sales and Use Tax Agreement (SSUTA). (20) Finally, in Part III, this Note analyzes the state and federal responses and argues that neither approach is well-suited to fix the problem; rather, Congress should pass more narrowly tailored federal legislation that is similar to that of New York's Amazon Law. (21)

II. HISTORY

A. The History of E-Commerce in the United States

While the Internet has an extensive and complicated history, the history of e-commerce is much more condensed, but equally as innovative and fascinating. (22) It was not until 1992 that the U.S. Congress first allowed people other than academics, government, or military personnel to use the Internet. (23) Thus, when individuals started using the Internet as a means of business in 1994, they were building on a preexisting social and scientific phenomenon that had developed over decades. …

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