An internet tax?

Currently states are prohibited from imposing taxes on internet sales if the business providing the good does not have a physical presence in the state. For state sthis can mean a significant loss in revenue. California estimated that it lost $208 million in sales taxes to internet sales in 2003; Michigan points to the internet for a loss of $345 million in 2005, while South Carolina says that it loses $40 million annually to purchases by residents of items over the internet This is based on a 1992 United States Supreme Court case, Quill Corp v. North Dakota. In that case the Supreme Court found that while it was clear that Quill, an office supply company with offices and warehouses in Illinois, California, and Georgia-but not North Dakota-did significant business by mail order in the state and benefited from the state’s efforts at business climate and waste disposal (think lots and lots of catalogs decomposing in landfills) the fact that it did not have a physical presence in the state was sufficient reason for North Dakota to not be able to tax purchases by North Dakota residents from Quill. The Court however did indicate that Congress could change this current limitation on the taxation of interstate commerce if the taxation met tests on the burden imposed on retailers ability to properly determine and administer the applicable tax.

In March of 2000 the National Conference of State Legislatures convened what has become the Streamlined Sales Tax Project (SSTP) . The goal of the Project is to create an agreement among states to “simplify and modernize sales and use tax administration” such that out of state retailers can be required to impose the appropriate sales tax. Currently 22 states are participating, representing 31% of the U.S. population. Wisconsin has recently applied to join.

The Project, and the Agreement it has created, works to develop greater uniformity and simplification in tax base definitions, rates, tax returns, and perhaps most importantly sourcing rules.

One critical dimension to apply sales and use taxes to out of state purchases is determining which states’ taxes should apply to the purchase-the state of origin (where the retailer is located) or on the state of destination (where the purchaser is located). The SSTP has a significant issue paper arguing that destination taxes are preferable to origin taxes providing there is greater uniformity of definition of items to be taxed and that only sales over a certain dollar threshold are taxed. Additionally they argue that the important act in the sale is in fact the use of the item rather than the sale of the object by the business.

In addition they argue practical consideration in the implementation of origin taxes. They argue that origin taxes would have an unintended consequence of impacting business location decisions, driving businesses with significant remote sales into states with lower sales taxes.

Simplification however isn’t always so simple. In Minnesota food is nontaxable, unless it is classified as prepared food. Food that is created at the same site where it is sold is generally classed as prepared food. At one point, due to that definition stemming from Minnesota’s participation in the SSTP, it meant that a loaf of bread sold in a bakery was considered a taxable item but that same loaf sold by a grocery store was not. Similar confusion revolved around the definition of prepared meats sold in the meat market versus those same meats sold in the meat department of a grocery store until legislative action exempted those items from taxation.

Given the number of states currently facing budget deficits, and the continuing growth in internet commerce interest in taxing interstate, internet sales can be expected to grow.

States Yearn to Collect Online Sales taxes http://news.cnet.com/States-yearn-to-collect-online-sales-taxes/2100-1028_3-5672198.html, downloaded February 27, 2009
http://www.streamlinedsalestax.org/index.html, downloaded February 24, 2009
http://www.streamlinedsalestax.org/issue_papers.html, downloaded February 24, 2009