State and Local Sales and Use Taxes and Internet Commerce Page: 2 of 16
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State and Local Sales and Use Taxes and Internet
Commerce
Summary
In theory, state sales and use taxes are consumption taxes based on the
destination principle. The destination principle prescribes that taxes should be paid
where the consumption takes place. Sales taxes collected at the point of sale achieve
this if consumption takes place near the point of transaction. Thus, to remain
consistent with the destination principle, consumers pay a use tax on products
purchased out-of-state and used in their home state where consumption likely takes
place.
Under current law, states cannot reach beyond their borders and compel out-of-
state vendors (without nexus in the state) to collect the use tax owed by state
residents. The Supreme Court has ruled that requiring remote vendors to collect the
use tax would pose an undue burden on interstate commerce. States are concerned
because they anticipate gradually losing more tax revenue as the growth of Internet
commerce allows more residents to buy products from vendors located out-of-state
and evade use taxes. Recent estimates put this loss at approximately $8 billion in
2003. For this report, "Internet taxes" are existing use taxes and taxes on Internet
access services. States that rely more heavily on the sales and use tax will likely lose
more revenue than states less reliant on the sales and use tax. Congress is involved
in this issue because commerce conducted by parties in different states over the
Internet falls under the Commerce Clause of the Constitution.
A related issue is the "Internet Tax Moratorium." The moratorium prohibits (1)
new taxes on Internet access services and (2) multiple or discriminatory taxes on
Internet commerce. This moratorium was created by the Internet Tax Freedom Act
(ITFA) of 1998 and had expired on October 21, 2001. Congress extended the
"Internet Tax Moratorium" through November 1, 2003, with P.L. 107-75, enacted on
November 28, 2001. The moratorium was extended for an additional four years,
through November 1, 2007, by P.L. 108-435, enacted on December 3, 2004. The
moratorium is related to the use tax collection issue, but is distinct from the remote
collection issue.The degree of further congressional involvement in the remote collection issue
is uncertain. Opponents of remote vendor use tax collection responsibility generally
support a clearer definition of nexus for use tax purposes. Many state officials would
like Congress to change the law and allow states to require out-of-state vendors
without nexus to collect state use taxes. Simplification and harmonization of state
tax systems are likely prerequisites for Congress to consider approval of increased
collection authority for states. This report will be updated as legislative events
warrant.
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Reference the current page of this Report.
Maguire, Steven. State and Local Sales and Use Taxes and Internet Commerce, report, March 9, 2006; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs9320/m1/2/: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.