For states, sales tax plays a crucial role in acquiring revenue. The development of e-commerce has led to states losing a potentially substantial amount of sales-tax revenue because Internet retailers (e-tailers), which often lack physical presence in states, are not required to collect sales tax for online sales. While consumers and e-tailers benefit from current tax laws and are content with them, state governments and brick-and-mortar retailers desire tax law reform, which could potentially provide increased state sales-tax revenue and also level the playing field for retailers who are subject to state sales taxes. This Article begins with a brief description of sales and use taxes, and follows with a discussion of significant Supreme Court cases, including National Bellas Hess, Inc. v. Department of Revenue of Illinois and Quill Corp. v. North Dakota, which required that retailers have a nexus with a state before they were subject to state taxation. Although these cases considered state sales tax as it applied to mail-order retailers, they provide the current framework for Internet sales-tax law by analogy. The Article then discusses the Internet Tax Freedom Act (ITFA), the Streamlined Use Tax Agreement (SSUTA), and other federal and state approaches to Internet sales taxation. State approaches include using e-tailers’ in-state marketing affiliates to establish physical presence in the state and collecting the taxes from consumers based on required sales reporting by e-tailers. The Article also considers the constitutional concerns (Due Process, Commerce Clause, Dormant Commerce Clause, and state constitutions) and the practical problems (including forcing states to all adopt the same rules and regulations) that both individual state approaches and the SSUTA face.
The Author argues that a blend of the state approaches and the SSUTA provides a solution to the problems associated with Internet sales taxation. Starting at the federal level, Congress should require retailers that have an economic presence in a state to collect state sales taxes. Such a standard, though previously rejected by the Supreme Court in Quill, would provide a constitutional regulation of interstate commerce by Congress and would thus avoid the constitutional problems raised by other approaches. Additionally, the two thresholds of the economic-presence test would incorporate portions of both the SSUTA and state methods, and would ensure that smaller retailers are not burdened by collecting state sales tax, while still allowing states to collect revenue from larger retailers’ Internet sales. Thus, the Author’s combined approach to Internet taxation is more likely to garner support from a majority of states and also from Congress, while simultaneously avoiding the constitutional and practical problems associated with other suggested approaches.