Background
When discussing taxation and the future of e-commerce, it is important to clarify that the Federal Internet Tax Moratorium has nothing to do with prohibiting taxation of Internet commerce across state lines. The Supreme Court decision, Quill vs. Heitkamp actually outlines when states can and cannot tax interstate commerce. The Court ruled that "a seller whose only connection with customers in a given State is by common carrier or the . . . mail" lacked the requisite minimum contacts with the state to require collection of sales or use taxes.2 In practice, this means that if a consumer purchases a product from a company in another state that has no personnel, inventory, or showrooms in his own home state, he does not pay sales taxes to that state.3 For example, if a person from New Jersey purchased an item by mail or over the Internet from a vendor whose only location was in Virginia, the seller is not responsible for collecting sales taxes.4 The customer is theoretically responsible for remitting the unpaid "use tax" to his or her home state; however, enforcement is nearly impossible and these taxes are rarely paid.
Many states and localities claim that their inability to collect sales taxes on certain types of interstate transactions will plague them with budgetary problems in the near future. This hypothesis is questionable. Mail order, an industry analogous to Internet commerce, has never accounted for more than 3% of all retail sales and as shown by the following graph, e-commerce accounts for less than 1% of all retail sales.5
A study by the Forrester Research Group found that states collected $140 million in sales taxes from e-commerce while they were unable to collect a total of $525 million in 1999.6 Although $525 million may sound like a lot of money, it amounts to less than .06 percent of all 1999 state and local tax receipts.7 Instead of doing harm to the states’ bottom lines, Internet commerce has been a leading contributor to recent economic growth. This growth and the state and local governments’ ever-growing thirst for taxpayer dollars has caused state and local government tax receipts to increase by over 30 percent between 1994 and 1999 as shown in the following chart.8
While e-commerce is certain to grow in coming years, the recent spate of dot-com failures is a clear indicator that traditional, face-to-face commerce remains strong. While many state officials may desire extra money in their coffers, the inability to collect taxes on certain types of e-commerce should not be cause for alarm.
Listed below are the various plans for dealing with Internet commerce. Each plan is discussed within the context of its constitutionality, and how implementation would impact taxpayers.
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