The proposal--expected to be made public soon after Tax Day--would rewrite the ground rules for Internet and mail order sales by eliminating the ability of Americans to shop at Web sites like Amazon.com and Overstock.com without paying state sales taxes.That advantage is eliminated if state taxing authorities enforced existing use tax reporting and payment requirements. However, most states don't because they consider it too difficult or bothersome to try since the use tax is often collected in conjunction with individual income tax or corporate income tax returns.
Dick Durbin of Illinois, the second most senior Senate Democrat, will introduce the bill after the Easter recess, a Democratic aide told CNET.
"Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?" Durbin said in a speech in Collinsville, Ill., in February. "Out-of-state companies that aren't paying their fair share of taxes are sticking Illinois residents and businesses with the tab."
At the moment, Americans who shop over the Internet from out-of-state vendors aren't always required to pay sales taxes at the time of purchase. Californians buying books from Amazon.com or cameras from Manhattan's B&H Photo, for example, won't pay the sales taxes at checkout time that they would if shopping at a local mall--which is what Durbin means by giving online retailers an "unfair advantage."
The problem with attempting to impose a state sales tax on out-of-state retailers comes down to a Supreme Court case, Quill v. North Dakota, that pretty much prohibits it unless the out-of-state retailer has nexus. Since out-of-state retailers don't have nexus, the taxing jurisdiction doesn't have the ability to impose tax collecting requirements on those retailers.
This law runs afoul of Quill from the outset but that isn't going to stop the likes of Durbin and others who see the Internet as a great untapped revenue source. The Court found that a corporation may have the minimum contacts required by the Due Process Clause and still fall short of the substantial nexus required by the Dormant Commerce Cause. Substantial nexus requires more than occasional sales. One needs to have people, property, or inventory in the state to overcome the nexus question - and that's a fact driven inquiry and one that can very from jurisdiction to jurisdiction.
So, because the question of nexus is a complicated one, Durbin and other Internet tax proponents have decided to substitute their judgment for that of the Court precisely because the dire need for revenue trumps solid legal reasoning and widely accepted tax concepts like nexus.
Pointing to the Streamlined Sales Tax Agreement isn't exactly a good guide for how to deal with taxing across jurisdictions either. The agreement is rife with adjustments, modifications, and exemptions that allow member states to technically adhere to the Agreement without having enacted the identical language (such as definitions that are critical to whether certain items are taxable or not).
The Agreement isn't a panacea on sales tax collection, and it further reveals the folly of trying to collect tax from thousands of individual jurisdictions (not just state sales tax, but county, special district, city, and town taxes that can result in oddball rates and drive sellers nuts in-state, but can be positively maddening for any out of state retailer and for the certified service providers who are support the tax collecting scheme by maintaining updated lists of tax rates and changes.
It's for that reason that enforcing use tax requirements is preferable to upending the nation's sales tax policy and settled sales tax law by throwing out the concept of nexus when it comes to transactional requirements.