All posts must be a minimum of 250-300 words.

EXHIBIT 11.1: Sales Tax Rates for the United States

The ability of states to impose sales tax on ecommerce transactions is not without limits. The Due Process Clause and the Commerce Clause of the U.S. Constitution regulate the extent to which states may impose sales tax. From a constitutional perspective, there are a number of requirements that must be met for a tax to be valid. The tax must be fairly related to the services provided by the state. The tax cannot discriminate. The tax must be fairly apportioned, and the business at issue must have a substantial nexus with the taxing state.

Problems with ecommerce taxation arise due to the fact that sales taxes are generally imposed based upon the physical presence of a business, while online services and products are generally sold from remote locations. The out-of-state ebusiness must have a nexus or physical connection with the taxing state in which the customer is located before it is obliged to collect and remit sales tax to the state taxation authorities. The physical presence requirement usually takes the form of a retail store, warehouse, employees, or sale representatives doing business in the taxing state. The taxing state must prove this nexus before an out-of-state company is required to collect tax from the buyer and remit it to the state. States may not require online companies to collect and remit sales taxes from their customers when those companies do not have a physical presence in the state.

In Quill v. North Dakota,22 the U.S. Supreme Court held that the Commerce Clause of the U.S. Constitution requires an out-of state merchant to have a physical presence in a state before it can be obligated to collect its taxes.

QUILL CORP. V. NORTH DAKOTA: 504 U.S. 298 (1992)

FACTS

Plaintiff in this case, the state of North Dakota, filed an action in state court to require Quill Corporation (Quill), an out-of-state mail order house, to collect and pay a use tax on goods purchased for use in the state. The trial court determined that a seller whose only connection with the customers in the state was by common carrier or the mail lacked the requisite minimum contacts with the state. The state supreme court reversed, holding that the Commerce and Due Process Clauses did not any longer require a physical presence in the state in order for the state to exercise its power over a company. Despite the fact that Quill, a Delaware corporation, had no employees living or working in North Dakota, the court held that advancements in technology and the mail order business as a whole rendered obsolete the law that required a physical presence in the state.

JUDICIAL OPINION (JUSTICE STEVENS)

The Supreme Court of the United States described North Dakota’s tax in the following way:

North Dakota imposes a use tax upon property purchased for storage, use, or consumption within the State. North Dakota requires every “retailer maintaining a place of business in” the State to collect the tax from the consumer and remit it to the State.23

The state included in the meaning of a retailer, a person who engages in regular or in systematic solicitation of a consumer market in North Dakota. The Supreme Court analyzed the Due Process Clause and the Commerce Clause separately in evaluating the state supreme court’s decision.

“The Due Process Clause ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’”24 This standard has been construed in the past to mean that any company that purposefully avails itself of the benefits of an economic market is considered to have a minimum contact with the state. As long as the tax is related to that benefit, the tax would be proper under the Due Process Clause.

The Commerce Clause, observed the Court,

expressly authorizes Congress to “regulate Commerce with foreign Nations, and among the several States.” It says nothing about the protection of interstate commerce in the absence of any action by Congress. Nevertheless, … the Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well The Clause… “by its own force” prohibits certain state actions that interfere with interstate commerce.25

One of the instances in which the Commerce Clause would prohibit state actions would be when the state taxes someone who does not have a substantial nexus with the taxing state. The state supreme court reasoned that when one has minimum contacts with the state, the substantial nexus test for Commerce Clause purposes would also be fulfilled. But the U.S. Supreme Court ruled that it is possible to have minimum contacts for purposes of the Due Process Clause, and still not have a substantial nexus for purposes of the Commerce Clause. The history of the Commerce Clause dictates that in order to have a substantial nexus with a state, one must have a physical presence there.

CASE QUESTIONS

1. Based on the standards articulated in the case sum mary, should the state be allowed to impose a use tax on Quill even though it does not have a physical presence in the state?

2. Is this the right decision? Should a state be able to impose income taxes on a company whether or not it has a physical presence, as the state supreme court held? Or, was the U.S. Supreme Court correct?

3. Ethical Consideration: Is this decision fair? Does the decision have the effect of withholding taxes from states that really rightfully deserve them? Quill was doing business in North Dakota—shouldn’t Quill ethically be obligated to pay taxes to a state that generated it so much revenue?

Although the Quill decision explicitly allowed Congress to enact legislation for the states to impose sales and use taxes on products sold by an out-of-state merchant, to date it has failed to do so. This has not, however, stopped states from attempting to collect sales tax for ecommerce transactions from retailers based outside of the state. Businesses often resist and many cases have resulted. Exhibit 11.2 summarizes the positions commonly taken by the parties in these cases.

EXHIBIT 11.2: Summary of Positions in Tax Cases

PARTY

POSITION

Plaintiff (always a state)

Plaintiff asserts the Defendant business has a sufficient presence in the state to justify imposition of the tax collection burden; because the business takes advantage of the benefits of doing business in this state, it must pay its way.

Defendant (always a business)

Defendant asserts that the state taxation law violates the Constitution because the federal government regulates interstate commerce and the state tax is unduly burdensome to interstate commerce. In the alternative, the business’s contacts with the state are not sufficient to justify imposition of the tax collection burden.

Many states technically require local residents to pay so-called use tax on such purchases, but most taxpayers ignore those rules. This concept may become clearer in context. Imagine you wish to purchase a new book. You have a couple of options for doing so. First, you can go to your local bookstore and purchase the book, in which case you will be charged sales tax on your purchase. Alternatively, you can make your purchase at an online retailer, in which case (unless you reside in one of a handful of states), you will not be required to pay sales tax on your purchase.

Given that we are in the Internet age, when state (and even national) boundaries are increasingly less significant, it is not too surprising that the concept of “physical presence” has given rise to a number of interesting disputes. In reviewing the cases, consider how judicial decisions are accomplishing the same goal as ecommerce sales tax legislation would. As the appellate court noted in the Borders case, courts “face with increasing frequency issues at the junction of Internet technology and constitutional principles.”26

(Ferrera 345-347)

Ferrera, Gerald R., Margo E. Reder, Stephen Lichtenstein, Robert Bird, Jonathan Darrow, Jeff. CyberLaw: Text and Cases. Cengage Learning, 01/2011. VitalBook file.