Taxing E-Commerce: An Abundance of Constraints

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I. Introduction II. The Internet Tax Freedom Act III. Case Law: Quill and its Offspring IV. Legislative Solution in Sight? V. Tax Policy Effectiveness VI. Amazon Laws, Colorado's Notification Approach, and the Intermediary Tax: Potential Solutions. VII. Conclusion and Recommendations I. Introduction Since the Internet became a staple of modern life just before the turn of the millennium, it has had the power to be a force for economic change. Sales over the Internet in the United States have increased from $56 billion in 2003 to $102.1 billion in 2006. (1) Global electronic commerce (e-commerce) sales were expected to top $1.25 trillion by 2013. (2) However, many of these transactions escape taxation by state and local governments, costing states billions in potential revenue. (3) The National Conference of State Legislatures estimates that states' losses total $8.9 billion per year. (4) This Note will examine the actions state and local governments, and ultimately, the Federal government, can take to find a permanent solution to the taxation of e-commerce. These governments will have to act in a way that will continue to promote the expansion of electronic commerce while providing revenue to the states that need it. Recently, the U.S. Senate took steps to solve the Internet tax dilemma by passing the Marketplace Fairness Act. (5) The Act would be a major step in the right direction, but it is uncertain that it will ever pass the House, where it has languished since May of 2013. (6) The plurality of stakeholders makes the issue particularly difficult, as well as critical. There are many obstacles facing the taxation of e-commerce. This Note advocates for various solutions to these obstacles that will maximize stakeholder overall welfare by avoiding overly burdensome business regulation, raising revenues for state and local governments, and minimizing the change in consumer behavior. II. The Internet Tax Freedom Act The Internet Tax Freedom Act (ITFA) was enacted in 1998 at the dawn of the Internet age. (7) The ITFA does not prohibit all taxation of Internet transactions, as its name may suggest, but it forbids on Internet and multiple or discriminatory on electronic (8) Discriminatory taxes refers to Internet-only such as bit taxes, email taxes, or bandwidth taxes. (9) Additionally, it refers to a higher tax on goods sold over the Internet than on the same goods sold traditionally. (10) The prohibition on both discriminatory and on Internet access clearly reflects Congress' intent to ensure the unhindered growth of the new medium of communication and commerce. However, nine states' Internet tax laws were grandfathered because they existed prior to the ITFA. (11) Additionally, the Act intended to clarify ambiguities in taxation of sales transactions. For instance, sometimes the same goods are not taxed when sold over the Internet but are taxed when sold in person. (12) Multiple refers to Congress's concern that e-commerce would be unduly fettered if an online retailer was subject to taxation both in the retailer's jurisdiction and the end user's jurisdiction, if different. (13) However, the ITFA does not clarify where jurisdiction does and does not exist. This leaves interpreting complex case law to discover that most interjurisdiction Internet sales remain untaxed and cost states billions in revenue. (14) Because lawmakers fear too many taxes, we may be left with too few. III. Case Law: Quill and its Offspring Even before the Internet age, courts occasionally struggled with the constitutional problems of taxing remote sellers outside of the purchaser's jurisdiction. (15) The Due Process Clause of the Fifth Amendment provides that no state can deprive citizens (of that state or another) of life, liberty, or property without due process of law. (16) This includes being deprived of tax dollars. …