The primary case that governs the relationship of sales tax and E-commerce actually predates the popularity of the Internet and involved a mail-order business. The U.S. Supreme Court ruled in Quill v. North Dakota, 504 U.S. 298 (1992), that a merchant must collect any applicable sales tax if the customer is from the same state in which the merchant has a "physical presence." In other words, if a merchant has a physical presence in Alabama, he or she must collect any applicable Alabama sales taxes on sales to Alabama consumers. However, if a merchant only has a physical presence in Alabama, the merchant will not need to collect any Georgia sales tax on an Internet sale to a Georgia consumer.

     The Court said that states and localities have implemented sales taxes in such a complicated way that out-of-state merchants collecting them impose an unreasonable burden on interstate commerce. Presently, there are over 7,000 state and local sales taxes throughout the U.S.

     In October 1998, Congress passed and the President later signed the Internet Tax Freedom Act, which imposed a three year moratorium on new Internet taxation. The Act established the Advisory Commission on Electronic Commerce (ACEC) to examine the taxation of Internet transactions and propose recommendations to Congress in April of 2000. Congress required a 2/3 vote of the ACEC in favor of any proposal before the proposal could be formally recommended to Congress.

     The ACEC debated many proposals during its term. Two main camps emerged from the debate: the anti-tax group lead by the chairman of the ACEC, Virginia Governor James Gilmore (R) and the pro-tax faction lead by Dallas Mayor Ron Kirk, Utah Governor Mike Leavitt (R)and the Clinton administration representatives. The anti-tax advocates argued that the imposition of the sales tax on E-Commerce would "stifle the economic revolution" and that evidence does not support the contention that this policy has hurt state and local governments. The pro-tax forces argued that the no-tax policy harms "brick-and-mortar" merchants by providing cheaper products on the Internet. They are also concerned about the stress that has been placed upon state and municipal infrastructures by the loss of the revenue from Internet sales.

     Politicians, not necessarily along party lines have entered the fray. President Clinton told the nation's governors that the federal government should not stand in the states' way if they want to apply sales tax to Internet purchases. Texas Governor George Bush (R) signed state legislation banning Internet access taxes and favors an additional five year moratorium. Vice-President Al Gore (D) favors the current moratorium, but is withholding further comment until the ACEC recommendations are made to Congress. U.S. House Minority Leader Dick Gephardt (D) stated that he supported an extension of the moratorium on Internet taxes, but only through 2003, in order to allow for a comprehensive solution to this dilemma.

     The ACEC was unable to reach the 2/3 level on any proposal after the Clinton administration representatives abstained from voting on most of the proposals, thus leaving each vote short of the supermajority level. The ACEC did reach a simple majority on the following proposals:

1. A five year extension of the present moratorium on new Internet taxes while state and local governments simplify their sales taxes;

 
2. a ban on the 3% federal excise tax on telecommunications, which was originally imposed in 1898 to support the Spanish-American War;

 
3. a ban on all Internet access taxes;

 
4. a clarification of "physical presence" in Quill;

 
5. creating a commission to oversee the streamlining the state and local sales tax regimes;

 
6. the exempting of certain sales so that they receive the same treatment in a physical store as they receive online. Examples included downloadable computer software, musical recordings, books, and CDS; and

 
7. to provide tax incentives to encourage public/private partnerships with the intent of narrowing the "digital divide."

 

     Please check back as we keep you updated on the status of these issues. For more information on this subject, please visit the sites listed on our links page.