The remote sales conundrum: where do we stand?

• Author: Gaffney, Susan

Have you ever wondered if orange juice should be taxed as a fruit or as a beverage? Whether some candy bars containing flour should really be classified as cookies? If when visiting a grocery store, a cup size portion of cole slaw accompanied by a plastic fork is considered a different product than a pound of cole slaw purchased from the deli counter? These are just some of the questions that have been answered over the past two years in an effort to create a nationwide uniform classification of goods. In so doing, state and local governments may now be at the brink of securing legislative approval in statehouses and in Washington that will finally allow them to collect taxes on remote sales.

William Fox and Donald Bruce of the University of Tennessee estimate that without the ability to collect sales taxes on Internet purchases, state and local governments could lose $45 billion per year by 2006. (1) According to the U.S. Department of Commerce, online sales grew 22 percent between 2000 and 2001, an astonishing rate considering that total retail sales grew only 3 percent during the same period. (2) There is no doubt that this trend will continue as more citizens integrate the World Wide Web into their daily activities. With nearly every state and local government facing budget shortfalls, the urgency to collect taxes on remote sales has never been greater. Fortunately, there is hope that this may occur as early as this year.

LEGAL AND LEGISLATIVE PROHIBITIONS

To date, Congress and the Supreme Court have prevented state and local governments from collecting taxes on goods purchased via Internet, catalog, telephone, or other non-physical media. In National Bellas Hess v. Illinois (1967) and again in Quill v. North Dakota (1992), the Supreme Court ruled that states cannot require vendors to collect and remit taxes on purchases made in states in which the vendors do not have a physical presence, or nexus. The basis for these decisions is that requiring businesses to collect taxes on such purchases would impose an undue burden because of the complexity of and variations in state and local government sales tax rates and structures.

Although these court decisions were based on catalog sales and were handed down before the emergence of the Internet and e-commerce, the rulings extend to all remote sales-including those made over the Internet. During the first session of the 107th Congress, legislators proposed 'no new Internet access or multiple and discriminatory taxes on the Internet until October 21, 2003." To the detriment of state and local governments, this moratorium legislation was enacted into law, while lawmakers defeated legislation that would have muted the Bellas Hess and Quill decisions by allowing states to require retailers to collect and remit taxes on remote sales.

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