Legislation has been introduced in the Senate that would prohibit states from taxing sales over the Internet, by telephone, mail or other direct response methods unless the seller has a physical presence within the state’s borders.
The measure, called the New Economy Tax Fairness or NET FAIR Act (S-664), sponsored by Sens. Judd Gregg (R-NH) and Herb Kohl (D-WI), would change the status of a nine-year old anti-use tax decision by the U.S. Supreme Court from decisional law to statutory law.
Also it sharply conflicts with the Internet Tax Moratorium and Equity Act (S-512) sponsored by Sen. Byron Dorgan (D-ND) which, in addition to extending the existing moratorium on new Internet taxes to Dec. 31, 2005, would authorize the development of an interstate compact allowing participating states to tax remote sales at a single, uniform rate.
Both bills are under review by the Senate Finance Committee.
Gregg and Kohl described their bill in a joint statement as a codification of a U.S. Supreme Court ruling “that states cannot force out-of-state mail order firms to collect sales taxes” because it would “be an unconstitutional burden on interstate commerce.”
In 1992 the nation’s top court held that states were barred from taxing mail order sales under the Constitution’s Commerce Claus unless given the authority by Congress. The case involved office supplies cataloger Quill Corp.’s challenge to North Dakota demanding that the company pay taxes on its mail order sales despite not having a physical presence in the state.
The Court also said that a seller had to have a substantial physical presence within a state before its sales could be taxed.
The Gregg/Kohl bill says, “No state shall have power to impose a business activity tax or a duty to collect and remit a sales or use tax on the income derived within such a state by any person from Interstate commerce unless such a person has a substantial physical presence in such a state.”
According to the bill, a company can be considered as having a physical presence in a state if it buys, stores, distributes and sells both tangible and intangible goods and services that would normally be taxed by the state.
But, it adds that a company’s sales would not be taxed if they are made by independent contractors, such as commissioned agents or brokers, who represent more than one remote seller.
The legislation, said Gregg, “builds upon the Quill decision by extending the same approach that currently governs catalog sales to the Internet.” He added that it would still allow states to require a company to collect sales and use taxes “only if their goods or services are sold to individuals living in states where the company has a substantial physical presence or nexus.”
Gregg also said it would give “legal certainty for companies and consumers that engage in interstate commerce via the Internet, telephone or mail order,” while not pre-empting a state’s right to tax commerce while protecting businesses and consumers “from unfair taxation.”
“If a business is located out-of-state and simply ships products to consumers there, it is not part of the local economy…does not use local services or infrastructure and…should not be subject to the taxes and tax collection burdens that support a community not its own,” Kohl added.
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