Is it time for a Federal sales tax on e-commerce sales on the internet? Our Colorado Legislature and other states’ legislatures are eagerly straining to impose a tax on the sales of goods on the internet.
I believe that such sales should be taxed in order to equalize the business opportunities of internet and non-internet businesses. It is time to eliminate the subsidy of e-commerce to the disadvantage of “brick and mortar” businesses. However, attempts by states to impose a sales tax are seriously flawed and may be unconstitutional in many cases. E-commerce businesses and their customers need to pay their fair share of these sales taxes.
It has been difficult for states to tax e-commerce sales because the U.S. Supreme Court held in the 1992 case of Quill Corporation v. North Dakota that the state cannot compel internet and mail order business companies to collect sales tax when the company has insufficient physical presence in the state.
Physical presence usually requires a form of office, warehouse, distribution, sales or manufacturing facility located in the state. It is patently clear that it is difficult to physically locate a company doing business in cyberspace where they have no such facility in the state. I think this is clearly interstate commerce and the U.S. Constitution provides that the U.S. Congress has the supreme power to make laws for excise taxes on interstate commerce.
Many small e-commerce businesses conduct their business out of a laptop wherever the business may be located on any particular day; and many of these small e-commerce businesses have an “affiliate” business relationship with large e-commerce businesses like whereby the small business refers customer orders to the large business for a commission on the sale.
The large business then ships the sale out of one of their warehouses located in a small number of U.S. states. For example, Amazon facilities are limited to four states in the United States. Colorado and few other states have tried to make Amazon collect a sales tax on sales based on their “affiliate” companies being a physical presence in the state.
As a result of the states’ effort to collect from Amazon, it has refused to collect the sales tax and has either disassociated with the “affiliates” or threatened to disassociate with “affiliates.” I think it is highly unlikely that this taxing strategy will pass court scrutiny; and Colorado legislature’s recent effort to back off their e-commerce law based on “affiliates” suggests that they agree.
The founder of said in 1999 that government should wait a few years to allow e-commerce to grow up before it is taxed. As we all know, e-commerce has become big business. According to the San Francisco Chronicle, it is estimated that the 2010 holiday e-commerce was more than $35 billion, which is about 10 percent of the total holiday commerce. Amazon alone had revenues of $34.2 billion in 2010 and had nearly 20 percent of the book sales in the United States. Is there any wonder why Borders went bankrupt?
Since states’ laws to collect sales tax on e-commerce are impractical and unenforceable it is therefore time to eliminate the disparity of taxation upon internet and non-internet businesses. It seems to me the only means of creating a uniform sales tax that can be collected from e-commerce business is for the U.S. Congress to pass a sales tax law imposing such taxes with the IRS eagerly and efficiently collecting the tax. Such a law should, of course, include internet and mail order sales of goods to customers in other countries.
The sales taxes collected by the Federal Government could be redistributed to the states apportioned according to the U.S. Census. This would appease the states’ concerns since they would then be preempted from collection of such taxes under the Supremacy Clause of the U.S. Constitution. Of course, the money could certainly be used these days by either Federal or State governments to meet their budgets. Yes, it is time to act now.
Dale Miller lives in Lakewood. EDITOR’S NOTE: This is an online-only column and has not been edited.
