The increasing amount of commerce conducted through and on the Internet also raises questions of whether and how that commerce should be taxed by the states. With respect to state sales tax laws and the Internet, the closest analogy is the law with respect to mail order (i.e., catalog) sales. In that context, the Supreme Court of the United States has ruled, most recently in Quill Corporation v. North Dakota, 504 U.S. 298 (1992), that a use tax imposed on a mail order firm that was not physically present in that state violated the Commerce clause of the U.S. Constitution. Note that the Quill decision is only the most recent of many cases dealing with whether and how a state may legally impose sales and use tax laws on businesses without any employees or property located within that state. Also, it should be noted that the majority opinion in the Quill case makes it clear that Congress’ power to regulate interstate commerce means that Congress is free to pass legislation overruling the Quill decision or any others like it.
With respect to state income taxation of Internet commerce, the closest analogy is the Supreme Court of the United States’s 1992 decision in Wisconsin Department of Revenue v. William Wrigley, Jr., Co., (505 U.S. 214). In that case, the Supreme Court was asked to interpret 15 U.S.C. § 381, which prohibits a state from taxing the income of a corporation whose only business activities within the state consist of “solicitation of orders” for tangible goods, provided that the orders are sent outside the state for approval and the goods are delivered from outside that state. At issue in that case were whether the activities in Wisconsin of Wrigley Co.’s sales representatives were so great as to fall outside the protection from tax offered by 15 U.S.C. § 381. The Court found that those representatives’ practices of providing free, replacement gum to retailers, of selling gum to retailers, and of storing gum at home or in rented spaces fell outside the statutory protection.
Internet Tax Freedom Act (ITFA)
On October 21, 1998, President Clinton signed into law the Internet Tax Freedom Act (ITFA). In November 2001, the ITFA was extended for two years. The ITFA, which expired in 2003, was an effort to preempt state and local taxes that are viewed by some as a potential threat to the growth of commerce on the Internet. The purpose of ITFA was to establish a national policy against state and local government interference with interstate commerce on the Internet by establishing a moratorium on the imposition of taxes that interfere with the free flow of commerce on the Internet. On December 3, 2004 President Bush signed the Internet Tax Nondiscrimination Act into law reinstating the ban on Internet access taxes for an additional three years.
As more and more businesses are looking at the Internet as a vehicle for selling products, there will be continued discussion as to whether the imposition of new efforts to collect government taxes will hinder electronic commerce. In the meantime, according to Forrester Research, Inc., on-line retail sales have exploded past $100 billion in 2003. This represents an increase from $500 million in 1995, $1.1 billion in 1996, and $6 billion in 1997 and $14.8 billion in 2000. On-line retail sales are expected to reach $269 billion in 2005. It should be noted, however, that Internet sales still represent only a small fraction of retail sales (less 6%). Whether or not the freedom from taxation for online commerce is justified or poses a significant threat to traditional retail businesses remains a significant issue.