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Wednesday, May 8, 2013

State Taxation of Internet Transactions

Steven Maguire
Specialist in Public Finance

The United States Bureau of the Census estimated that $4.1 trillion worth of retail and wholesale transactions were conducted over the Internet in 2010. That amount was 16.1% of all U.S. shipments and sales in that year. Other estimates, based on different data, projected the 2011 socalled e-commerce volume at approximately $3.9 trillion. The volume, roughly $4 trillion, of ecommerce is expected to increase, and state and local governments are concerned because collection of sales taxes on these transactions is difficult to enforce.

Under current law, states cannot reach beyond their borders and compel out-of-state Internet vendors (those without nexus in the buyer’s state) to collect the use tax owed by state residents and businesses. The Supreme Court ruled in 1967 that requiring remote vendors to collect the use tax would pose an undue burden on interstate commerce. Estimates put this lost state tax revenue at approximately $11.4 billion in 2012.

Congress is involved because interstate commerce typically falls under the Commerce Clause of the Constitution. Opponents of remote vendor sales and use tax collection cite the complexity of the myriad state and local sales tax systems and the difficulty vendors would have in collecting and remitting use taxes. Proponents would like Congress to change the law and allow states to require out-of-state vendors without nexus to collect state use taxes. These proponents acknowledge that simplification and harmonization of state tax systems are likely prerequisites for Congress to consider approval of increased collection authority for states.

A number of states have been working together to harmonize sales tax collection and have created the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA member states hope that Congress can be persuaded to allow them to require out-of-state vendors to collect taxes from customers in SSUTA member states.

In the 112
th Congress, S. 1452 and H.R. 2701 (Senator Durbin and Representative Conyers) would have granted SSUTA member states the authority to compel out-of-state vendors in other member states to collect sales and use taxes. H.R. 3179 (Representative Womack) would have also granted states the authority to compel out-of-state vendors to collect use taxes provided selected simplification efforts are implemented. S. 1832 (Senator Enzi and others including Senator Durbin) would have granted SSUTA member states and non-member states that meet less rigorous simplifications standards the authority to compel out-of-state vendors to collect sales and use taxes. For a constitutional analysis of the legislation, see CRS Report R42629, “Amazon Laws” and Taxation of Internet Sales: Constitutional Analysis, by Erika K. Lunder and Carol A. Pettit. In the 113th Congress, S. 336 and S. 743 (Senator Enzi and others) and their House counterpart H.R. 684 (Representative Womack and others) would grant SSUTA member states and non-member states that meet less rigorous simplifications standards the authority to compel out-of-state vendors with greater than $1 million in remote sales to collect sales and use taxes.

A related issue is the “Internet Tax Moratorium.” The relatively narrow moratorium prohibits new taxes on Internet access services and multiple or discriminatory taxes on Internet commerce. Congress has extended the “Moratorium” twice. The most recent extension expires November 1, 2014. An analysis of the Internet tax moratorium is beyond the scope of this report.

Date of Report: March 19, 2013
Number of Pages: 21
Order Number: R41853
Price: $29.95

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