An Uncommon Carrier: The Fcc’s Unintended Effects on Constitutional Use Taxation

By Perez-Vargas, Maricarmen | Washington Law Review, September 1, 2017 | Go to article overview

An Uncommon Carrier: The Fcc’s Unintended Effects on Constitutional Use Taxation


Perez-Vargas, Maricarmen, Washington Law Review


INTRODUCTION

In 2013, the New York State Court of Appeals did something that courts in the United States had not done since before the 1960s: impose use tax collection obligations on sellers that did not have physical presences within the state of New York.3 Although the sellers, Amazon.com, Inc. (Amazon) and Overstock.com, Inc. (Overstock), appealed, the Supreme Court denied certiorari.4 The Overstock decision sparked a debate that had been largely dormant since the early 1990s- what does a "physical presence" mean in the modern economy?5

Ever since the 1960s, states have been unable to collect use taxes from sellers without a physical presence within their borders.6 Courts have consistently upheld this bright-line rule in order to comply with the Supreme Court's interpretation of the dormant Commerce Clause.7 Some states have recently attempted to relax this rule in order to recoup lost revenue due to the development of the internet economy.8 In 2013, the state of New York subjected Amazon and Overstock to use taxation collection obligations, finding a physical presence through the sellers' advertisements on websites that had owners located in New York.9

The internet's recent classification as a common carrier through the Federal Communications Commission's (FCC) 2015 Open Internet Order,10 however, could preclude courts from reasoning that internetbased connections can produce a physical presence subjecting the seller to use taxation collection obligations within a state. Because the United States Supreme Court has recognized and upheld a distinction between sellers with a physical presence within a state and sellers that "do no more than communicate with customers in the State by mail or common carrier," if the internet is a common carrier, then sellers whose only connections with a state are through the internet cannot establish a physical presence through that connection.11

Notably, the Open Internet Order is not necessarily permanent. The Order has been challenged by litigants.12 Furthermore, the FCC, now headed by Ajit Pai, recently proposed a new rule that would revoke the common carrier classification of internet service providers (ISPs).13

This Comment explores the impact of the FCC's 2015 classification of the internet as a common carrier on the current constitutional use taxation framework.14 Part II describes the historical development of the constitutional use taxation framework through Supreme Court decisions. Part III describes the modern approach and the anomalous decision made by the New York State Court of Appeals allowing the state to tax sellers without a traditional physical presence within the state.15 Part IV gives background on the FCC's designation of the internet as a common carrier and discusses potential changes to this designation under the new presidential administration.16 Part V analyzes the effects of this reclassification on constitutional use taxation, and demonstrates the significance of the common carrier language in the National Bellas Hess v. Department of Revenue11 rule when applied to the internet. This Comment concludes that under the current administrative framework, decisions such as the one in Overstock.com, Inc. v. New York State Department of Taxation and Finance18 are precluded by the internet's status as a common carrier. This Comment notes, however, that this status is tenuous as it is dependent on impermanent administrative actions.

I. THE HISTORICAL DEVELOPMENT OF CONSTITUTIONAL USE TAXATION: A STRUGGLE BETWEEN STATE SOVEREIGNTY AND AN EVOLVING ECONOMY

Courts have struggled throughout United States history with identifying the boundaries of the individual states' power to tax.19 The Supreme Court has attempted to balance two competing goals. First, the Supreme Court seeks to prevent protectionism, defined as "regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors."20 One scholar commented that "[t]he quintessential instrument of protectionism is the protective tariff, a duty on imports of a certain good imposed for the purpose of securing a greater share of the home market for domestic producers of the good. …

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