Online retailers battle with sales tax: a physical rule living in a digital world.

Author:Patch, Emily L.

"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)


    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) 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)


    1. 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. (24) Likewise, e-commerce created an extension of the catalog model, allowing for more convenient ordering, larger selections, and broader reach at a lower cost, ultimately expanding the retail giants in unprecedented ways. (25)

      Retail "is a large, diverse, and complicated sector of the economy," including everything from basic necessities to high-fashion luxuries. (26) On one end of the spectrum, retailers focus their efforts on a single product--such as gas stations selling gasoline; on the other end, retailers carry thousands of diverse products--such as grocery stores. (27) Likewise, some retailers operate one local store, while others run a global network of chains. (28) Physical retail stores, otherwise known as brick-and-mortar retailers, operate over one million establishments in the United States and account for about forty-two percent of U.S. personal-consumption expenditures. (29) The brick-and-mortar retailers were slow to adopt e-commerce, despite their preexisting presence among consumers and their inherent advantages in terms of "existing vendor networks, category familiarity, retailing experience, and a local presence." (30) Rather, venture-backed dot-coms and small companies already versed in e-commerce led the online-retailing era. (31)

      Today, online shopping has surpassed catalog shopping and accounts for about five percent of American retail spending. (32) Despite difficult economic times, online shopping continues to rise. (33) More people than ever before are using the Internet as a medium not only for web surfing, but also for shopping. (34) As a result of the Internet, the taxation of e-commerce and electronic transactions quickly became controversial, raising considerable debate over, inter alia, the issue of sales tax. (35)

    2. The Evolution of Amazon

      The 1990s were a booming time for bookstores in the United States. (36) Building on the preexisting abundance of discount stores, Barnes & Noble and Borders took it to the next step, introducing massive superstores. (37) Opened in former warehouses or movie theaters, these superstores stocked around 100,000 titles, an inventory five times greater than that of the average local bookstore. (38) As books became cheaper and easier to access, Jeffrey Bezos, founder and Chief Executive Officer of Amazon, saw an opportunity to utilize the Internet in order to take this phenomenon yet another step: to put these megastores online where the inventory could be greater and the prices could be cheaper. (39)

      In 1994, Jeffrey Bezos, a then thirty-year-old Princeton graduate, incorporated the online company Amazon in Seattle, Washington. (40) When Amazon first opened for business in July 1995, it consisted merely of a few people working out of a two-car garage. (41) Beginning solely as a bookstore, in July 1995 Jeffrey Bezos shipped the first book ever sold by Amazon. (42) Although the existence of an online bookstore initially raised curiosity among consumers, it quickly became recognized as an easily accessible and convenient alternative to the local bookstore that could not afford to stock such a wide variety of titles. (43) Within the first thirty days of business, Amazon sold books to online shoppers in all fifty states and forty-five countries; the company has been growing ever since. (44)

      In 1996, Amazon introduced an affiliate marketing program known as Amazon Associates. (45) Through this program, Amazon invites all website owners to participate--whether their sites are large and well-known, small and specialized, or anything in between. (46) A participant, or "associate," directs Internet traffic from its personal site to Amazon based on click-through links on the associate's website. (47) The associate then earns a percentage of the revenue that Amazon generates as a result of all purchases made using the associate's respective click-through link. (48) Anyone can sign up and, as advertised on the website, "its easy and free [for anyone] to join." (49)

      In similar fashion, Amazon launched its Marketplace in November 2000. (50) Using Amazon Marketplace, large and small retailers alike may list their goods for sale on Amazon. (51) Through this program, sellers can use the Amazon platform and take advantage of the Amazon brand to sell their products nationwide. (52) By the end of 2004, Amazon had over 100,000 Marketplace sellers, which accounted for forty percent of Amazon's total sales revenue. (53) Today, Amazon has become the quintessential twenty-first-century mail-order company, with its website reaching millions of Internet users every day in the United States and around the world. (54)

    3. Sales Tax

      In the United States, there is no national sales tax. (55) Consequently, state and local governments have historically received complete autonomy in deciding which goods and services will be subject to sales and use tax and, likewise, in administering and enforcing the collection of such taxes. (56) With the rise of e-commerce, and the issues it raises in terms of states' abilities to tax remote transactions, the courts, with guidance from the Constitution, have shaped the way sales tax and e-commerce complement one another. (57)

      1. Case Law

        In 1960, the United States Supreme Court held in Scripto, Inc. v. Carson (58) that the presence of ten "specialty brokers" working on behalf of Scripto in the taxing state was sufficient to subject the out-of-state retailer to sales-tax requirements. (59) Scripto operated an advertising specialty division in Atlanta, Georgia, which did not "own, lease, or maintain" any place of business nor employ any salesperson or agent within the State of Florida. (60) Scripto did, however, solicit orders from Florida residents using "specialty brokers" who were residents of Florida, ten of whom Scripto employed at the time of suit. (61) After Florida ordered Scripto to register as a dealer under the state tax statute and...

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