Several Tax Profs participated in a “Hot Topics” panel yesterday at the AALS Annual Meeting in San Francisco on Taxing Internet Sales: The Battle Between States and Retailers:

• David Gamage (UC-Berkeley)
• Andrew Haile (Elon)
• Randle Pollard (Widener)
• Darien Shanske (UC-Hastings)
• John Swain (Arizona)

Buying goods over the internet has become a part of life for most Americans. But the increase in e-commerce has come at a cost to state tax revenues. This is because the constitutional rules relating to the collection of sales tax on purchases from remote retailers were set by a U.S. Supreme Court decision (Quill v. North Dakota) in 1992, well before e-commerce became a major factor in the American economy. Quill held that a retailer must have a physical presence in a state before the state may require the retailer to collect sales tax. As a result, most states may not require companies like Amazon (which have intentionally limited their physical presence to a handful of states) to collect their sales tax. Nevertheless, sales taxes are still owed on goods sold over the internet. As a result of Quill, however, states have been forced to rely on consumers to self-report their internet purchases and pay taxes owed on those purchases. This “honor system” for paying sales taxes has failed. Few consumers actually report their internet purchases. The lost sales tax revenue to the states from having to rely on consumers to self-report their internet purchases is estimated to total $12 billion per year – a particularly substantial loss given the states’ severe budget problems.

This panel considered recent developments in the states’ efforts to require retailers to collect sales taxes on internet sales or, alternatively, to enforce the consumers’ obligation to report their internet purchases and pay the taxes owed on those purchases. The panel also assessed the constitutionality and effectiveness of the different approaches taken by the states to address this problem. Finally, the panel discussed the future of taxing internet sales.