Internet sales tax policy and implementation

Internet Tax

The issue of an Internet sales tax has been at the topic of much debate over the past few years. The issue is a complicated one and the budget crises' facing many states has made it a crucial one. The purpose of this discussion is to examine Internet tax legislation. We will begin by exploring the current status of Texas legislation regarding internet Taxation. We will also investigate the Federal Law regarding Internet taxation. Our research will also discuss the National Governors Association's model legislation to streamline and simplify state taxation. Additionally, we will explore the jurisdiction requirements that allow states to impose sales taxes and the case law that affects states' ability to tax Internet sales.

Texas Legislation

In 1999 Texas legislation proposed that the state would join the streamlined sales tax project. In recent years the legislation has adopted the practices of the streamlined sales tax project.

Texas has currently has one the most stringent Internet tax systems of any state in the union. The state was concerned that it was loosing valuable tax revenue for sales made over the Internet. The Houston Business Journal explains that a merchant in Rhode Island can sell a product over the Internet to an individual residing in Texas but the state will not have the benefit of charging a sales tax because it is unaware of the purchase. This scenario has made lawmakers in Texas and other states criticizing the current federal legislation governing Internet sales tax.

Federal Law

The federal legislation that governs Internet sales tax is known as the Internet tax freedom act. The act, created in 1998, "placed a moratorium on new Internet taxes and on multiple and discriminatory taxes on e-commerce." (Kuster and Untermeyer 2001) The law is extremely controversial and many states complain that the laws that govern the act are too complicated. The Houston Business Journal explains some of these rules, saying,

Online transactions are not exempted from a state's sales tax by the moratorium. If a state chooses to levy a sales tax, that tax is applicable regardless of whether the purchase was made in person, by telephone, through the mail or online. The Internet Tax Freedom Act moratorium does, however, prevent states from enacting discriminatory taxes on online sales. That means that a state cannot charge a new tax online that doesn't exist "offline," nor impose a higher tax for online sales than the taxes levied for offline sales." (Kuster and Untermeyer 2001)

Many states believe that the structure of the act is fallible and must be addressed. The unprecedented growth of the Internet has contributed greatly with states discontent about the act. Although the act has experienced great opposition, the moratorium was renewed in 2001 for an additional five years.

Many of the complaints about the act are actually caused by another federal law known as the Dormant Commerce Clause. According to the Yale Journal of Law, "The dormant Commerce Clause is a judge-made doctrine that prohibits states from regulating in ways that unduly burden interstate commerce." (Goldsmith and Sykes 2001) This clause makes it difficult for states to create certain legislation regarding e-commerce because of restrictions related to jurisdictions and interstate commerce which we will discuss later on in the paper.

The National Governors Association's model

Several different states have adopted the use of the streamlined sales tax project. According to a briefing by the joint venture tax policy group,

The Streamlined Sales Tax Project (SSTP) stems from the simplification suggestions made in the minority report of the federal Advisory Commission on E-Commerce (formed by the Internet Tax Freedom Act) and suggestions of the National Governors Association (NGA) in 1999. A group of representatives from over 35 states met throughout 2000 to create a Model Act and Agreement for a uniform and simplified sales and use tax act. The language was approved by the participating states in December 2000. (Nellen 2001)

The briefing goes on to explain the principles of SSTP explaining that the project is designed to simplify the sales and use tax systems. The SSTP includes several rules to make this system possible, some of these include;

Standardization in the state and local tax bases. (Nellen 2001)

State level administration of sales and use tax collections. (Nellen 2001)

Central, electronic registration system for all member states. (Nellen 2001)

Simplification of state and local tax rates. (Nellen 2001)

Standardized definitions within tax bases. (Nellen 2001)

Simplified administration of exemptions. (Nellen 2001)

Protection of consumer privacy. (Nellen 2001)

Standardized sourcing rules for all taxable transactions. (Nellen 2001)

Simplification of tax remittances." (Nellen 2001)

Jurisdiction requirements

Issues concerning jurisdiction requirements are particularly cumbersome for states that desire to implement an Internet sales tax. The Houston Business Journal asserts that there are approximately 46 states that exercise sales and use taxes. Within these 46 states there are about 7,600 different jurisdictions that have varying taxation rates. This makes it difficult for states to charge the appropriate taxes. The article also explains that jurisdiction issues also have a profound effect on retailers. The article explains,

Rules governing a company's taxing status within a particular state based on the company's physical location or locations -- can differ from one state to the next. Retailers operating with multi-state presence or multiple country presence must determine taxing jurisdictions and applicable exemptions. They must know how much sales tax to charge and how to remit it. Without clear and uniform nexus standards, it is extremely difficult for companies to determine tax requirements." (Kuster and Untermeyer 2001)

As you can see the issues concerning various jurisdictions within a single state infringe upon the states ability to charge the appropriate sells tax throughout the state. In large states such as California and Texas this problem has been difficult to solve. The SSTP that we reviewed earlier in our discussion is designed to reduce some of the confusion associated with jurisdictions and Internet tax.

Case Law

One of the most prominent cases involving Internet taxation was California V. Borders Online. The state asserted that the bookstore owed the state sales and use tax nexus because it accepted returns on Internet purchases. E-commerce Tax News explains,

Borders Online, Inc. is an Internet-based seller of books and other merchandise, which does not maintain a place of business in California. All merchandise is shipped by common carrier to customers in California from outside the state. Borders Online is affiliated with Borders, Inc., a separate entity, which operates "bricks-and-mortar" stores throughout the country, including stores in California." (Hardesty 2001)