State Taxation of Internet Transactions

The United States Bureau of the Census estimated that $4.1 trillion worth of retail and wholesale transactions were conducted over the Internet in 2010.That amount was 16.1% of all U.S. shipments and sales in that year.Other estimates projected the 2011 so-called e-commerce volume at approximately $3.9 trillion.The volume of e-commerce is expected to increase and state and local governments are concerned because collection of sales taxes on these transactions is difficult to enforce.Under current law, states cannot reach beyond their borders and compel out-of-state Internet vendors (those without nexus in the buyer's state) to collect the use tax owed by state residents and businesses.The Supreme Court ruled in 1967 that requiring remote vendors to collect the use tax would pose an undue burden on interstate commerce.Estimates put this lost tax revenue at approximately $11.4 billion in 2012.Congress is involved because interstate commerce typically falls under the Commerce Clause of the Constitution.Opponents of remote vendor sales and use tax collection cite the complexity of the myriad state and local sales tax systems and the difficulty vendors would have in collecting and remitting use taxes.Proponents would like Congress to change the law and allow states to require out-of-state vendors without nexus to collect state use taxes.These proponents acknowledge that simplification and harmonization of state tax systems are likely prerequisites for Congress to consider approval of increased collection authority for states.In addition, a final condition requires that the rates determined in (1) and ( 2) above cannot exceed the average rate applicable to in-state vendors.For purposes of (3), the state must provide vendors access to a tax rate database for all jurisdictions.Remote vendors with total United States remote sales under $1 million or remote vendors with less than $100,000 in a given state, are exempt from collection responsibility.Like H.R. 3179, S. 1832 would allow remote collection authority for non-SSUTA states if minimum simplification requirements are achieved.Following is a brief summary of key simplification requirements for Congress to grant collection authority under S. 1832:• provide a single state-level agency to administer and audit sales tax returns;• provide a single sales and use tax return for vendors;• provide a uniform sales tax base for all jurisdictions within the state;• set tax rates at the combined state and local sales tax rate where the goods or taxable services are delivered (the destination rate);• provide remote vendors with "adequate" software for determining the appropriate destination rate.S. 1832 would establish a small seller exception for vendors with less than $500,000 in U.S. Internet sales.The legislation also includes a provision to limit the collections authority to just sales tax and not the imposition or application of other taxes such as franchise, income, and occupation taxes.