Taxing the Interwebs

Democratic Senator Dick Durbin (Il.) is expected to introduce legislation that would result in the payment of state sales taxes for purchases made on the internet.  For the lawyers among you, here’s the legal background:

The current legal and political landscape was shaped by a 1992 case called Quill v. North Dakota, in which the U.S. Supreme Court ruled: “Congress is now free to decide whether, when, and to what extent the states may burden interstate mail order concerns with a duty to collect use taxes.”

Under the Quill ruling, out-of-state retailers generally don’t have to collect taxes. One exception to that rule is a legal concept called “nexus,” which means a company can be forced to collect sales taxes if it has a sufficient business presence, which is why Amazon doesn’t have an office in California. (Another exception is the sale of cigarettes, which is covered by the Jenkins Act.)

An important caveat is that under existing law, online purchases from sites like Amazon and eBay only seem to arrive tax-free. Legally, however, purchasers are required to pay their own state’s sales tax rate–the concept is called a “use tax”–and then voluntarily report the amount owed at tax time. Few do.

At a time when States are in dire need of new sources of revenue to keep existing services afloat, this legislation could provide much needed money for state treasuries.  Such a tax would also appear to level the playing field for local businesses that exist as physical stores.  This seems to be the emphasis, given that the bill has been dubbed the Mainstreet Fairness Bill.  For example, say you’re debating between buying a book on Amazon versus buying it at that last remaining physical book store in your city/town.  On amazon you don’t pay sales tax but at your local book store you probably do.

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