A Cyberspace Perspective

Taxation of Internet Commerce: Should the Mail Order Industry Serve as a Model


Steven J. Forte


VOL. XV • Winter 1997 • NO. 2 (table of contents)

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Cite as:

15 John Marshall J. of Comp. & Info. Law 203


Federal intervention is necessary to grant states the authority to collect state sales and use tax from Internet vendors who sell goods within their boundaries but reside elsewhere. With such federal intervention, local retailers, who must charge state use and sales tax to their customers, can compete more fairly with Internet vendors. In addition, state governments can access a large and growing revenue source.

Under the Commerce Clause of the United States Constitution, a vendor must have a physical presence on a state before a state can require the vendor to collect and remit sales and use tax. In addition, an out-of-state vendor, who has a sufficient nexus with the taxing state, may be required to collect, register and remit use taxes. An out-of-state vendor has a sufficient nexus with a state when the vendor maintains a place of business within the taxing state and when the vendor conducts non-sales activities within the taxing state. A retail vendor whose only contacts with a taxing state are by mail or common carrier lacks sufficient nexus and cannot be required to collect tax. Based on these principles and arguments, which include administrative burdens, loss of sales and fewer benefits from states with no physical presence, the mail-order industry has successfully fought attempts by Congress which would grant states the authority to impose tax collection responsibilities on out-of-state mail-order vendors. Internet vendors will align themselves similarly in order to prevent legislation, which would impose tax collection duties upon them. However, these principles are outdated, and the mail-order industry's arguments were successful only because of the industry's strong lobbying efforts and Congressional insecurity regarding a constitutional challenge of such legislation.

The Internet industry is young and does not currently contain the lobbying force of the mail-order industry. In addition, the Supreme Court has acknowledged that Congress is better qualified to evaluate tax burdens on interstate commerce, alleviating the threat of any major constitutionality challenge. Federal legislation should be drafted which focuses on an Internet vendor's informational presence in a state through its web page. The vendor's informational presence will be transformed to an economic presence upon the vendor's first Internet sale to a party in a taxing jurisdiction. This new economic presence will be sufficient to satisfy the nexus requirements of the Commerce Clause triggering the lawful imposition of state tax collection responsibilities on the Internet vendor.

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