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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. A use tax is the companion to a sales
tax-in general, the sales tax is imposed on the sale of goods and services within the state's
borders, while the use tax is imposed on purchases made by the state's residents from out-of-state
(remote) sellers.' The purpose of the use tax is to dissuade residents from purchasing goods and
services from out-of-state merchants in order to avoid the sales tax.2
Sales and use taxes are imposed on the consumer. However, states generally prefer that retailers
collect and remit them, rather than relying on the consumer to pay the tax since consumer
compliance is low. State laws requiring retailers to collect and remit these taxes are subject to
federal law. First, the 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 (ITFA),
which prohibits multiple or discriminatory taxes on electronic commerce. ITFA also prohibits
state and local taxes on Internet access.
This report first looks at the Constitution's requirement of nexus, including an examination of
whether recent state laws comply with the nexus standard and federal legislation that would affect
the standard. It then looks at the scope of the ITFA moratorium on multiple or discriminatory
taxes on electronic commerce and taxes on Internet access.
Constitution's Nexus Requirement
There is a common misperception that the U.S. Constitution prohibits states from taxing Internet
sales. This is not true. States have the power to tax their residents on online purchases, even when
the seller is located outside the state and has no real connection with it in this situation, the state
can impose the use tax on the purchaser. The Constitution does, however, limit the state's power
to require an out-of-state seller to collect use tax from the purchaser on behalf of the state.
Specifically, the Due Process Clause of the Fourteenth Amendment and the Commerce Clause
both require that a sufficient connection or "nexus" exist between a state and an out-of-state
business before the state may impose tax obligations on it.3
Due process requires there be a sufficient nexus between the state and the seller so that (1) the
state has provided some benefit for which it may ask something in return and (2) the seller has
fair warning that its activities may be subject to the state's jurisdiction.4 The dormant Commerce
Clause requires a nexus in order to ensure that the state's imposition of the liability does not
1 For information on state sales and use taxes, see CRS Report R41853, State Taxation ofInternet Transactions, by
2 See Miller Bros. Co. v. Maryland, 347 U.S 340, 343 (1954) (uses taxes, while not significant revenue raisers, have
two purposes: "One is protection of the state's revenues by taking away from inhabitants the advantages of resort to
untaxed out-of-state purchases. The other is protection of local merchants against out-of-state competition from those
who may be enabled by lower tax burdens to offer lower prices.").
3 U.S. CONST. Amend. 14, 1 ("nor shall any State deprive any person of life, liberty, or property, without due process
of law ... "); Art. 1 8, cl.3 ("The Congress shall have Power ... To regulate Commerce with foreign Nations, and
among the several States, and with the Indian Tribes"). The Supreme Court has long held that because the Constitution
grants Congress the authority to regulate interstate commerce, the states may not unduly burden such commerce-this
is known as the dormant Commerce Clause. See Okla. Tax Comm'n v. Jefferson Lines, 514 U.S. 175, 180 (1995).
4 See Quill v. North Dakota, 504 U.S. 298, 308 (1992).
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/m1/4/: accessed November 22, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.