law of computer technology fall 2015 © 2015 michael i. shamos internet taxes michael i. shamos,...

LAW OF COMPUTER TECHNOLOGY FALL 2015 © 2015 MICHAEL I. SHAMOS

Internet Taxes

Michael I. Shamos, Ph.D., J.D.Institute for Software ResearchSchool of Computer ScienceCarnegie Mellon University


Michael Faraday describing electricity to a politician:

“Sir, I do not know what it is good for. But of one thing I am quite certain, some day you will tax it.”

SOURCE: SUZETTE BARTA


Purpose of Taxes

• Raise revenue• Implement policy (encourage/discourage activities)

– e.g., cigarette tax, gasoline tax• Political implications

– Politicians want (need) taxes– But: don’t want their own citizens to pay them– Favor “invisible” taxes (not paid by their voters)

• Over 20,000 taxing jurisdictions in the U.S.


Sales Tax v. Use Tax

• Sales tax: tax on the sale price of tangible goods or of services– Collected from the customer by the merchant, paid

by merchant to the state• Use tax: tax on use of tangible property within a

state, even if the sale did not occur there– Property purchased outside a state but used in

state requires payment of use tax– Business pay use taxes; consumer usually evade

them


Use Tax Example

• “an excise tax is hereby levied on the storage, use, or other consumption in this state of tangible personal property or the benefit realized in this state of any service provided.” Ohio Rev. Code §5741.02

• “Tangible personal property or services rendered upon which taxes have been paid to another jurisdiction [shall be reduced by] the amount of the tax paid to such other jurisdiction.”


Legal Authority for Taxes

• “Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” U.S. Const., Art. 1 §8, clause 1.

• “No Tax or Duty shall be laid on Articles exported from any State.” U.S. Const., Art. 1 §9, clause 5.

• “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports” U.S. Const., Art. 1 §10, clause 2.

• “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S. Const., Amendment 16.


Collection of Tax

• National Bellas Hess, Inc. v. Dep’t of Revenue of Illinois, 386 U.S. 753 (1967)

• Hess was a mail order house in Missouri and Delaware. It sold significant amounts of goods to consumers in Illinois.

• Illinois ruled that Hess had to collect use taxes for Illinois

• Supreme Court: “If Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes.”

• One state cannot force another to collect its taxes


Collection of Tax

• Quill Corp. v. North Dakota Tax Comm’r., 504 U.S. 298 (1992) • Quill had presence in Delaware, Illinois, California, and

Georgia

• North Dakota required Quill to collect use taxes for North Dakota

• North Dakota Supreme Court found Hess to be obsolete based on “remarkable growth of the mail order business”

• U.S. Supreme Court: Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well. The clause ... prohibits certain state actions that interfere with interstate commerce

• North Dakota cannot force Quill to collect the tax


Collection of Tax

No State … shall have power to impose … a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State … are …

(1) the solicitation of orders … in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State …

15 U.S.C. §381

One state can’t tax a foreign corporation’s income from sales on orders solicited in that state


Who Has the Right to Tax in Cyberspace?

• A tax is valid only if the activity taxed has a “substantial nexus” to the taxing state. (Due process.)

• State must have jurisdiction over the transaction and the taxpayer

• Can Pennsylvania tax an amazon.com transaction with a Pennsylvania consumer?

– Can it force the consumer to pay use tax?

– Can it force amazon.com to collect the use tax?


Eroding Tax Base

• Ecommerce transactions generate little tax

– Many are interstate

– More electronic goods

– Many are unmonitored, unaudited

– Underground economy: barter, auctions

– Unfairly high cost to local merchants

• Total tax base is eroding

• Proposed solutions:

– Value-added tax

– Communications (bit) tax

– National sales tax


Taxation

• Tax law deals with services (rendered by physical people) and physical goods. When goods are electronic, problems arise.

• All state that have sales tax (45) charge tax on Internet sales of goods. (No sales tax in New Hampshire, Oregon, Massachusetts, Alaska, and Delaware)

• Most states charge sales tax on downloaded software

• A small number of states charge sales tax on downloaded data (content)

• Ten states tax Internet access.


St. Tammany Parish Tax Collector v. Barnesandnoble.com

• Barnesandnoble.com has no physical presence in St. Tammany Parish, Louisiana

• Barnes and Noble, a sister companyof bn.com, has a retail bookstore inTammany Parish

• If a book was out of stock at Barnesand Noble, it placed an order for thecustomer at bn.com

• Barnes & Noble and bn.com sold gift cards usable at both Barnes & Noble and bn.com

• Books bought on bn.com could be returned for credit at Barnes & Noble


St. Tammany Parish Tax Collector v. Barnesandnoble.com

• Barnes & Noble, Inc. owns 100% of bn.com and Barnes & Noble Booksellers, which operates the retail stores

• The St. Tammany Parish Tax Collector sued Barnes & Noble and bn.com for failure to collect sales tax on bn.com transactions

• The Court held that bn.com did not have sufficient nexus with the Parish to allow taxation: “The existence of a close corporate relationship between companies and a common corporate name does not mean that the physical presence of one is imputed to the other.”

• Court: there was no revenue to bn.com from the bookstore returns


Internet Tax Freedom Act• In 1998, when the Internet boom was in full swing,

Congress worried that e-commerce would be stifled by new taxes

• It enacted the Internet Tax Freedom Act to maintain a haven for this growing sector. It prohibited– New taxes on Internet access (old ones OK)– Multiple or discriminatory taxes on e-commerce (except for

material “harmful to minors”)

• Original term: Oct. 1, 1998 - Sept. 30, 2001• Extended to Nov. 1, 2003, then Nov. 1, 2007• Extended again to Dec. 11, 2014, then Dec. 11, 2015


Discriminatory Internet Tax

• One that is imposed on Internet sales but not ordinary sales

• Allowing sales tax to be collected from an e-store by multiple states for a single transaction

• Multiple tax: tax on an Internet sale over and above a regular sales tax


Internet Tax Amendments of 2007

• INTERNET ACCESS-(A) a service that enables users to connect to the Internet to access content, information, or other services offered over the Internet;(B) includes the purchase, use or sale of telecommunications (i) to provide such service; or (ii) to otherwise enable users to access content, information or other services offered over the Internet;(C) includes services incidental to the provision of the service described in subparagraph (A) when furnished to users as part of such service, such as a home page, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity;


Internet Tax Amendments of 2007

INTERNET ACCESS(D) does not include voice, audio or video programming, or other products and services (except services described above) that utilize Internet protocol or any successor protocol and for which there is a charge, regardless of whether such charge is separately stated or aggregated with the charge for services described above and(E) includes a homepage, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access.


Internet Tax Amendments of 2007‘tax on Internet access’ does not include a State tax expressly levied on commercial activity, modified gross receipts, taxable margin, or gross income of the business, by a State law specifically using one of the foregoing terms, that—(I) was enacted after June 20, 2005, and before November 1, 2007;(II) replaced, in whole or in part, a modified value-added tax or a tax levied upon or measured by net income, capital stock, or net worth;(III) is imposed on a broad range of business activity; and(IV) is not discriminatory in its application to providers of communication services, Internet access, or telecommunications.


Marketplace Fairness Act of 2013(proposed, not yet enacted)

• “remote sale” = sale of goods or services into a state where seller would not now be required to pay or collect local sales/use tax

• Applies to businesses with $1 million or more in sales

• Requires compliance with the Streamlined Sales and Use Tax Agreement of 2002


Marketplace Fairness Act of 2013Simplification Requirements

• State must designate a single entity responsible for all State and local sales and use tax administration

• Provides for a single audit of a remote seller for all State and local taxing jurisdictions within a State

• A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration in each State.

• State may not require a remote seller to file sales and use tax returns any more frequently than returns are required for non-remote sellers

Some version of this bill is likely to pass


States’ New Approach• If the Internet retailer cannot be forced to collect tax, have them

identify state residents who bought goods over the Internet and what they bought

• Then the state can impose use tax• North Carolina court: First Amendment protects a buyer from the

government demanding to know the books, music, and audiovisual products they've bought. Amazon.com v. Lay (W.D. Wash., Oct. 25, 2010)

• U.S. Supreme Court: Direct Marketing Association v. Brohl (Mar. 3, 2015). Suit can be brought in Federal courts to enjoin reporting requirements. And: the Quill holding should be re-examined.


Direct Marketing Association v. Brohl• Colorado enacted a merchant reporting statute that applied to

out-of-state merchants who did not collect Colorado sales taxes but shipped goods to Colorado (“noncollecting retailers”):

• 39 Clo. Rev. Stat. 21-112.3.5(d)(I)(A):• “Each retailer that does not collect Colorado sales tax shall file

an annual statement for each purchaser to the department of revenue on such forms as are provided or approved by the department showing the total amount paid for Colorado purchases of such purchasers during the preceding calendar year or any portion thereof, and such annual statement shall be filed on or before March 1 of each year.”


Tax Injunction Act• At issue is Direct Marketing Association v. Brohl was the Tax

Injunction Act (“TIA”), 28 U.S.C. §1341: • “The district courts shall not enjoin, suspend or restrain the

assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”

• A unanimous Supreme Court (rare) ruled that the TIA did not remove subject matter jurisdiction from the federal courts over transaction reporting as required by Colorado.

• Enjoining “reporting” would not “restrain the assessment, levy or collection of any tax.”


Major Ideas

• Taxation is largely geographical• The Internet is not geographical, hence causes

problems in tax collection• A state may not be forced to collect taxes for another

state; hence many Internet transactions do not incur ordinary sales taxes

• Self-reported use taxes are impossible to collect• To prevent states from attempting to use the Internet to

raise revenue, Congress repeatedly extends the Internet Tax Freedom Act, now in effect until Dec. 11.


Amazon and California

• Amazon claims to have no nexus to California• Amazon has “affiliates” in California – web sites that refer

sales to Amazon.com– User visits referrer site, sees that a book is for sale, clicks link– User is taken to Amazon’s site, orders book– Amazon ships from outside California – Amazon pays the referrer a fee (commission)

• Amazon does not collect sales tax on purchases shipped into California

• California passed a law in 2011 to require collection of sales tax in these circumstances


Amazon and California• In July 2011, California passed a new law requiring certain out-

of-state companies to collect sales tax.• It includes “Any retailer having any representative, … , [or]

independent contractor … in California under the authority of the retailer or its subsidiary for … selling, or … taking of orders for any tangible personal property.”

• The would require Amazon, because of its California affiliates, to collect sales tax on ALL sales made to California (not just sales through its affiliates)

• Amazon does not want to collect the tax• Amazon sponsored a proposed vote to repeal the tax


Amazon and California

• Amazon sent termination notices to its 10,000 California affiliates

• On September 23, 2011: California and Amazon settled– California will postpone enforcement for 1 year.

Amazon will then start collecting sales tax– California will lose $200 million– Amazon will hire 10,000 workers in California and

build distribution centers


Amazon

• Amazon is building distribution centers around the country to speed up deliveries

• It has to collect tax in those states• Now collects tax in 8 states and has agreed to future

collection in 7 more• Amazon has a software development office in

Massachusetts and owns a robotics company there, but does not collect Massachusetts 6.25% sales tax

• On Nov. 10, 2012, Governor Patrick threatened Amazon with legislation to force it to pay tax for this Christmas season


QA&


Tax Definitions• Bit tax. Tax on electronic commerce measured by the volume of

digital information transmitted electronically. • Capitation. A tax imposed on an individual without regard to goods,

services or income• Duty. Usually, a tax imposed on imports into a country • Excise. A tax based on the value of services or property other than

real estate, levied on the home market.• Goods and services tax (GST). VAT on goods and services• Impost. Old word for a tax, now usually an import duty.• Sales tax. Tax on sales collected for the gov’t by a merchant• Tariff. Tax on the value of imported goods.• Use tax. Tax on the privilege of using goods within a jurisdiction• Value-added tax (VAT). Indirect tax on consumption assessed on the

increased value of goods at each point in the chain of production and distribution. Collected from the end user.

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