E-Commerce Taxation – Illustrating Classic Legal Environment and Business Law Concepts

1. E-Commerce Taxation – Illustrating Classic Legal Environment and Business Law Concepts UMKC Bloch School Internet Tax Policy Project Rita Cain & Larry Garrison

2. Relevant Constitutional or other Course Concepts • Federal Commerce Power, • Undue burden on interstate commerce by the states, (the Negative Commerce Power). • Individual due process rights -- minimum contacts • Separation of powers between legislative and judicial branches.

3. Core Learning Objectives • Students will be able to explain how the constitutional commerce power is the basis for the current conflict over e-commerce taxation by the states. • Students will understand the relationship of the due process/minimum contacts analysis to the e-commerce tax jurisprudence. • Students will be able to recognize separation of powers principle that is reflected in the Quill case. • Students will be able to recognize the doctrine of stare decisis as applied by the US Supreme Court in the Quill case.

4. Sales and Use Tax Primer • 45 states impose sales taxes. • Sales Taxes are submitted by the seller to the state where the sale occurred. • Sellers are obligated to collect sales taxes as part of the privilege of conducting business in the state—Due process NEXUS requirement.

5. Sales and Use Tax Primer (continued) • Use Taxes are part of every sales tax system, to prevent buyers from going to non-taxing jurisdictions to make purchases and avoid paying sales tax. HOW? • Use Taxes are charged TO THE BUYER for goods purchased in non-taxing jurisdiction and brought into the Buyer’s HOME state for “use” there. • Businesses usually understand the obligation to remit use taxes on goods bought out-of-state for business use. • Consumers seldom appreciate use tax payment obligation when moving goods across state lines.

6. Chronology of Legal Events 1967 S.Ct. decides National Bellas Hess • Established PHYSICAL nexus requirement for use tax collection • Due Process & Commerce Power rationales.

7. Chronology of Legal Events 1967 S.Ct. decides National Bellas Hess 1985 Burger King • Established PHYSICAL nexus requirement for use tax collection • Due Process & Commerce Power rationales. • Eliminated physical nexus requirement for personal jurisdiction (Due Process)

8. Chronology of Legal Events 1985 Burger King 1967 S.Ct. decides National Bellas Hess 1992 S.Ct. decides Quill • Eliminated physical nexus requirement for personal jurisdiction (Due Process) • Established PHYSICAL nexus requirement for use tax collection • Due Process & Commerce Power rationales. • Reversed Bellas • Hess re: due • Process. • Retained nexus • requirement • under • Commerce Clause

9. Quill Decision • Quill (1992) reversed Bellas Hess on due process concept. Applied Burger King. • Upheld Bellas Hess based on Commerce Power. Economic considerations under Commerce Power differ from due process rights analysis. Stare Decisis applied. • States cannot require tax collection from out-of-state sellers. But, Congress can alter the result because it is a matter of interstate commerce, not an individual due process protection. • “Undue burden” is a fact analysis for legislative, not judicial branch. S.Ct. noted 6000 sales tax jurisdictions in US. Now approximately 7500.

10. ECOMMERCE TAX PROBLEM IN A NUTSHELL • To require a seller to collect and remit the SALES tax, Buyer’s state must establish NEXUS with that seller. WHAT AMOUNTS TO NEXUS IN DISTANCE SALES? Quill provides the answer: PHYSICAL PRESENCE in the taxing state is still required. • If no NEXUS, Buyer’s state is entitled to USE TAX from the buyer. HOW DOES A STATE TRACK AND ENFORCE USE TAX OBLIGATIONS IN DISTANCE TRANSACTIONS?

11. Additional/Optional Learning Objectives • Students will be able to explain the relevance of Quill to new state taxes on internet services. • Students will understand the impact of the Internet Tax Freedom Act. • Students will be able to explain the purpose behind the Streamlined Sales Tax System.

12. Does Quill Apply to Taxes on the Internet? Are state sales taxes on internet services such as access, email delivery, downloaded software or media barred by Quill?

13. Does Quill Bar State Taxes on Internet Services? Similarities to Quill analysis: • Internet service vendors would have little/no physical presence in most states. • Many vendors may have very few transactions in some states during each taxing period. • Vendors may have no knowledge of where the buyer resides. Deliveries are to IP addresses, not street locations. Potentially impossible burden to know applicable tax jurisdiction(s).

14. Does Quill Bar State Taxes on Internet Services? Distinctions from Quill. • Internet industries emerged after Quill. No expectation of a tax exemption based on Bellas Hess precedent like goods sellers had leading up to Quill. • Many vendors are large telecom providers that are already collecting state taxes on cable &/or phone services. Nominal burden to collect tax on additional services like DSL.

15. Chronology of Legal Events 1998 Congress passes Internet Tax Freedom Act (ITFA) 1985 S.Ct.decides Burger King 1967 S.Ct. decides National Bellas Hess 1992 S.Ct. decides Quill • Eliminated physical nexus requirement for personal jurisdiction (Due Process) • Reversed Bellas • Hess re: due • Process. • Retained nexus • requirement • under • Commerce Clause 3-year moratorium on states’ power to impose NEW taxes on internet services (expanding Quill result to transactions not expressly covered). • Established nexus concept for use tax collection • Due Process & Commerce Power rationales.

16. Chronology of Legal Events 1992 S.Ct. decides Quill 2001 ITFA extended to 2003 1967 S.Ct. decides National Bellas Hess ? Repeated extensions by Congress through 2010 1985 S.Ct.decides Burger King 1998 Congress passes Internet Tax Freedom Act (ITFA)

17. Latest Developments-State • States are NOT rushing to pass new internet service taxes despite expiration of federal moratorium. • Streamlined Sales Tax System. States’ attempt to make tax collection less burdensome/more amenable to congressional approval. http://www.nga.org/nga/salestax/1,1169,,00.html • State collection attempts through individual income tax filings. Some exempt first $X00 in purchases.