Taxation of Internet Sales and Access: Legal Issues Page: 2 of 16
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Taxation of Internet Sales and Access: Legal Issues
In recent years, there has been significant congressional interest in the states' ability to impose
sales and use taxes on sales made over the Internet. While these taxes are imposed on the
consumer, states generally prefer that retailers collect and remit them, rather than relying on the
consumer to pay the tax. State laws requiring retailers to collect sales and use taxes are subject to
federal law. First, such laws must comply with the U.S. Constitution, of which two provisions are
particularly relevant the dormant Commerce Clause and the Fourteenth Amendment's Due
Process Clause. Second, such laws must comply with the Internet Tax Freedom Act.
Both the dormant Commerce Clause and the Due Process Clause require that a retailer have a
certain connection or "nexus" to the state before the state can require the collection of tax. The
Supreme Court has held that the required nexus under the dormant Commerce Clause is the
seller's "physical presence" in the state, while due process requires only that the seller have
directed purposeful contact at state residents. Notably, Congress may change the "physical
presence" standard under its power to regulate interstate commerce, so long as it is consistent
with other constitutional provisions including due process. In the 114' Congress, legislation has
been introduced (S. 698, Marketplace Fairness Act) that would allow a state to impose sales and
use tax collection duties on remote sellers, regardless of physical presence, if the state (1) is a
member of the multistate Streamlined Sales and Use Tax Agreement (SSUTA) or (2) sufficiently
simplifies its sales and use tax laws and administration.
In addition to the Constitution, state sales and use tax collection laws must also comply with the
federal Internet Tax Freedom Act (ITFA). It imposes a temporary moratorium on states imposing
discriminatory or multiple taxes on electronic commerce. The moratorium also generally
prohibits state taxes on Internet access. The act is scheduled to expire on October 1, 2015.
Meanwhile, some states have recently enacted laws, often called "Amazon laws" after the
Internet retailer, in an attempt to capture uncollected taxes on Internet sales while still complying
with the "physical presence" standard. States enacting these laws have used two basic
approaches: (1) "click-through" nexus, which imposes the responsibility for collecting taxes on
retailers who compensate state residents for placing links on their websites to the retailer's
website and (2) requirements that remote sellers provide information about sales to the state and
State Amazon tax laws have raised issues under both the U.S. Constitution and the ITFA and have
had a mixed reception in the courts. While the highest court in New York upheld that state's click-
through nexus law against facial challenges on Commerce Clause and due process grounds, a
federal district judge struck Colorado's notification law as violating the dormant Commerce
Clause. However, the appeals court subsequently determined that federal courts do not have
jurisdiction to hear the Colorado challenge due to the federal Tax Injunction Act. In March 2015,
the U.S. Supreme Court held in Direct Marketing Association v. Brohl that the act did not apply to
this suit, but left open the possibility that the suit might be barred by the comity doctrine. Notably,
Justice Kennedy wrote a concurrence in which he suggested that Quill should be reconsidered in
light of technological advances and the development of the Internet. With respect to the ITFA, the
Illinois Supreme Court held in 2013 that the state's click-through nexus law violated the statute's
moratorium on discriminatory taxes because it treated retailers engaged in online performance-
based marketing differently than those with similar print and broadcast marketing arrangements.
Congressional Research Service
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Taxation of Internet Sales and Access: Legal Issues, report, April 10, 2015; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc811021/m1/2/: accessed December 17, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.