State Taxation of Electronic Commerce: Perspectives on Proposals for Change and Their Constitutionality
Houghton, Kendall L., Hellerstein, Walter, Brigham Young University Law Review
Over the past few years, an enormous amount of attention has been devoted to the problems raised by state taxation of electronic commerce,1 possible solutions to those problems,2 and, more recently, the question of whether there is a "problem" at all.3 We have both been, and continue to be, deeply involved in the debate over these issues4-a debate that has sometimes generated more heat than light. We view this forum as furnishing us an opportunity to take a step back from the fray and to offer our views not only on the critical issues that are dominating the debate but also on the process by which that debate is being conducted.
Part I of this article provides an overview of the issues raised by state taxation of electronic commerce. Part II examines the debate over these issues, and suggestions for their resolution, within the framework of the National Tax Association's Communications and Electronic Commerce Tax Project ("NTA Project" or "Project")5 and the proceedings before the Advisory Commission on Electronic Commerce ("ACEC").6 Part III considers the federal constitutional limitations on congressional power to implement proposals addressed to state taxation of electronic commerce.
Electronic commerce-the use of computer networks to facilitate commercial transactions involving the production, sale, and distribution of goods, services, and intangible property-has significant implications for state and local taxation, as it does for just about everything else.7 Electronic commerce provides the environment in which digital products or services are transferred and sold. These products and services include text, sound, video, and other content that can be expressed as series of ones and zeros. Electronic commerce also opens up new avenues for marketing traditional goods and services directly to consumers. It creates similar opportunities for businessto-business transactions involving both digital and nondigital products and services. Indeed, American companies currently make billions of dollars worth of sales to one another over the Internet, several times the consumer retail total, and it is estimated that businessto-business sales could exceed one trillion dollars in the near future.8
Unless virtually all predictions are wrong, the growth of electronic commerce will continue to produce a dramatic expansion of commercial transactions occurring through digital networks. The advent of electronic commerce raises a number of questions as to whether and how state and local taxes, particularly state and local sales and use taxes, should be applied to such commerce. These questions include:
whether the existing state and local sales and use tax system is compatible with an electronic commerce environment;
whether electronic commerce should be taxed at all considering the difficulty of taxing such commerce;
whether not imposing or collecting tax on electronic commerce will undermine the sales and use tax base and create inequalities between sales of equivalent goods and services depending on the form or mode of delivery;
whether the multiplicity of, and inconsistency among, existing state and local use tax laws creates an undue burden on sellers and purchasers in an electronic commerce environment, and, if so, whether it is possible to create greater consistency in state and local sales and use tax laws to facilitate application and administration of such laws in an electronic environment; and
whether, and under what circumstances, vendors should be required to collect sales and use taxes where they have no physical presence in the state in which their product or service is delivered, assuming a state of delivery can be identified, and where, in some circumstances, vendors may have little or no information regarding their customers' location.
A. Attributes of Electronic Commerce with Significant Implications for State and Local Taxation
Electronic commerce increases the ability of sellers, including those who could not previously sell to a national and international market, to engage in interstate and international commerce through direct interaction with potential buyers. …