The future of e-commerce tax liability.

• Author: Wall, Patricia S.

In this age of rapidly developing technology, many consumers think they can avoid paying sales tax simply by buying merchandise online, through catalogs or out-of-state. However, 45 states have adopted use taxes as counterparts to their sales taxes; most have been on the books since the late 1940s. Generally, the use tax is the same rate as the sales tax, and helps the state recoup the revenue lost by not collecting taxes on sales. The burden is on the consumer to report out-of-state purchases to his or her home state's revenue department. As more and more sales are being conducted over the Internet, some states are becoming more dependent on the use tax as a source of revenue.

Development of the Use Tax

States have relied on sales taxes as an important source of revenue for a number of years. A sales tax is collected on the sale of personal property and some services in most states, similarly to the Canadian Goods and Services Tax and the European value-added tax (VAT). While sales tax is levied on consumers, the dealer (seller) is required to collect and remit it.

As state residents began buying big-ticket items (such as cars and furniture) out-of-state, most states added a use tax. This tax is defined generally as one on the use or consumption of tangible property or services when no sales tax has been collected. For a few goods and services, collecting a use tax is easy; states collect this tax on cars when the new owner tries to obtain registration. For purchases of other property and services out-of-state, however, states generally have to rely on voluntary compliance by the buyer. Most states require consumers to report taxable property or services on use tax return forms. Further, most give credit for taxes paid to another state, and allow an offset for tax liability purposes, with some exceptions (such as cars and boats).

Cases: To Constitutionally require the dealer to collect and remit sales tax under the Commerce Clause, the U.S. Supreme Court found, in Quill Corp. v. North Dakota, 504 US 298 (1992), that the dealer must have physical presence (nexus) in the state.

In Quill, a dealer sold $1 million worth of office supplies through direct-mail advertising to 3,000 North Dakota residents. The corporation's only presence in the state was software that it licensed to customers. All of the corporation's products were delivered by common carrier, which the court found was not a physical presence. Thus, the Quill Court reaffirmed...