Introduction:
On 1st October, 1998 the US government enacted the Internet Tax Freedom Act (ITFA) with the intent to further promote and develop the internet technology. The ITFA put a bar on the states and the localities from imposing taxes on internet access. This law placed a moratorium on the special taxation on the internet. A moratorium is a legally authorized period of delay. The effect of doing so was that the internet provider companies like Comcast or American online did not have to tack on a state tax of their services.
However, this law came about with one exception which was commonly referred to as the grandfather clause. A grandfather clause allows the implementation or continuance of the old laws instead of the new ones. This term held different meanings during the old times but today it is simply inferred as an exception that allows an old law to continue despite the new law. The exception in this law was that it allowed states that were already imposing taxes on access to the internet before 1st October 1998 to continue doing so. The states which fell under this exemption were Connecticut, Iowa, New Mexico, North Dakota, South Dakota, Ohio, South Carolina, Tennessee, Texas and Wisconsin, and the District of Columbia.[1]
The Idea and Purpose Behind ITFA
This law had been enacted when the internet was experiencing enormous growth and development. The officials of the US government saw a need to preserve this growth and taxes were seen as an obstruction to such growth, the idea behind such exemption was that any information available to the public on the internet should not be taxed. If the users of the internet saw this as a financial drawback then there was a huge possibility that the digital world would experience a major setback and would prefer going back to opting for physical means.
In order to track the efficacy of an IFTA, the Congress set up a special committee to research the problem of taxes and to determine the importance of continuation of the law. The committee was called the Advisory Commission of Electric Commerce. In addition to this, a special moratorium was placed on “multiple and discriminatory taxes on electronic commerce” which meant that many states and governments were unable to tax a consumer for buying something over the internet. [2]
For example, if a person wants to buy a book online from a store in the state of Washington while he/she was geographically in the state of Georgia, the ITFA forbids both these states to impose tax.
Application of the Act
When you order online, it is normally the same as if it was bought off-line. Here the concept of “Nexus” comes into play. The issue which arises here is whether the seller of a certain object is required to collect the tax, this is called nexus. If the seller over the internet fails to collect sales tax on a taxable sale, it is the obligation of the purchaser to pay the “use” tax which was due on the purchase to the state where the property is used.
As evident, use tax is a tax on the keeping or consuming of an item or service which ideally should have been taxed but tax on such item was not paid. It is a tax that is complimentary to sales tax. The Use Tax is not unfair and it applies to the same volume of items that are bought outside the state (mail order, Telephone, out-of-state retail, home shopping). Therefore, you are also held personal responsibility for the use tax, regardless of being paid tax on an object bought on the internet.[3]
The Act was signed in 1998 on Internet Tax Freedom. The Internet was still the “start-up,” and the premise was that people wanted a way to access the Internet. At the time, people mostly used it for email! Since no one knew it, the initial act was a 10-year ban on the taxation of Internet usage, instead of a lifelong exemption. There were a few countries that currently taxed internet usage. They have been grandfathered and have been allowed to hold tax.
A seven-year continuation of the Act was signed into law by President George W. Bush on October 31, 2007. A new definition for “Internet access” has been introduced in this new Statute, Internet Tax Freedom Act Amendments Act (2007) that provides consumers with access to content, data, or other resources by accessing the internet. And until 1 November 2014, the Grand-Père provision or the grandfather clause was also extended for Internet access tax which was usually enforced and valid before October 1, 1998. On November 1, 2014, the Act expired, at which point President Barack Obama signed federal law extending the Act until December 11, 2014.
President Barack Obama signed a law on December 16, 2014, which contained an amendment extending the Internet Tax Freedom Act until October 1, 2015, with all provisions unchanged. Then on September 30, 2015, which contained an amendment that expanded the Internet Tax Freedom Act to December 11, 2015. Again the president signed a law on December 18, 2015, expanding the Internet Tax Freedom Act to October 1, 2016. Also extended to October 1, 2016, were previous rules that grandfathered taxes that occurred before October 1, 1998. The House of Representatives passed H.R. on December 15, 2015. 235, the Act of Permanent Internet Tax Freedom.
While there was still anticipation that the Permanent Internet Tax Freedom Act would be included in one of the nexus extension clauses that did not happen. The United States by way of approval by the Senate on February 11, 2016, passed a permanent expansion of the Internet Tax Freedom Act and was included in H.R. 644, the 2015 Act on Trade Facilitation and Trade Compliance. For the seven states that now levy a tax on internet usage, the bill also sets an end date of June 30, 2020. The states are Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin. On February 24, 2016, President Obama signed into law the indefinite expansion of the Internet Tax Freedom Act. Agreement was reached for hearings to be held on the nexus bills by the end of 2016 as part of the negotiation.[4] Presently, there are 6 states which do not have an Internet sales tax. They are Alaska, Delaware, New Hampshire, Montana, and Oregon.[5]
Tax Nexus
The capacity of a state to tax transactions is based on the idea of a tax nexus, which means that the seller has a presence in the state. Your company will have a nexus if it does business in the state, including:
- Getting a physical
- office or a place where you do business (in your home, for example),
- Sale or delivering items in the state to a customer,
- Getting a logistics facility, such as a storage room or warehouse,
- Getting workers employed in the state, whether private contractors, salesmen, representatives, or agents.[6]
Background of South Dakota V Wayfair
Sales taxes produce significant profits for states, but they have to act closely. When one state imposes more sales tax than its rivals, consumers start purchasing big-ticket goods when crossing state lines. When the economy takes a dive and individuals buy fewer commodities, states still experience the strain. And more lately, when shopping on the internet, consumers have begun to actively circumvent state sales taxes. Apart from states, sales taxes are also levied by certain localities. Today, sales taxes are charged by localities in 38 states and are added to state sales taxes.
Quill V North Dakota
This case tried to set a definition of tax nexus. A 1992 ruling by the Supreme Court (the case of Quill v. N. Dakota) aimed to resolve the problem of internet transactions. The Quill decision said, according to the Tax Foundation, that company “must have a physical presence in a state in order to require the collection of sales or use tax for purchases made by in-state customers” (in other words, a tax nexus). The Quill decision did not fix the issue, since sales taxes were to be paid only for those online retailers who had a tax nexus in a jurisdiction.
For example, sales tax will have to be paid by an internet vendor who is based in Iowa and sells to clients in Iowa. But if the buyer is in Illinois and has an online presence, the vendor would not charge sales tax because Illinois did not have a sales tax nexus with the seller.
A Test Case
In order to avoid the outflow of tax revenues, states have been proactive in extending the concept of the tax nexus since the Quill ruling. Several states have developed tax regulations on internet transactions, which have led to litigation by online retailers such as Wayfair and Overstock.
South Dakota enacted a law in 2016 that would mandate out-of-state suppliers to collect and pay internet sales tax in the same manner and at the same rate as in-state distributors. This only extends to bigger merchants in the state that have more than $100,000 in revenue or more than 200 sales purchases in a year, saving smaller vendors from the need to raise sales taxes on the internet. The state legislation will use the buyer’s location in the state as the criterion for internet sales tax collection.[7]
South Dakota has petitioned the U.S. Supreme Court as a test case to review the case of Quill. Specifically, the U.S. asked S. Dakota. “To overrule Quill’s physical-presence requirement which currently prevents the State from requiring out-of-state retailers to remit taxes for sales made within South Dakota.”[8]
Internet Sales Taxes (Present)
The Wayfair case may, but only temporarily, have settled the internet sales tax situation. One specific state was the subject of the Wayfair case, and the Court based its opinion on the circumstances of that state: The law in question requires the tax to be collected by a merchant only if a significant amount of business is carried out in the State; the law is not retroactive; and South Dakota is a party to the Streamlined Sales and Use Tax Agreement.[9]
The Court, however, expressed concern that future cases could address retroactivity issues and the burden on small businesses. According to Justice Kennedy, in the present case, these questions are not before the Court; but their potential to arise in a later case cannot justify the retention of this artificial, anachronistic rule, which deprives States of vast revenues from major undertakings.[10]
There is one simplification already in effect. A former Marketplace Fairness Act recommended that an established association be extended to better keep the method of collecting internet sales taxes equal. In 1999, this non-profit organization, called Streamlined Sales Tax (SST), was established as a way of “simplify and modernize sales tax administration.”
At present, 44 states, with centralized administration and reciprocity arrangements, standardized tax rates, and uniform tax bases, have agreed to join. According to this agreement, states agree to encourage sellers to collect internet sales tax from customers living in the SST organization states.
Conclusion
Implementing the ITFA has its pros and cons. The government receives the tax money can use it to contribute to existing projects and government-sponsored services by imposing a tax on internet purchases, or it can put the funds into debt reduction. The government will be able to harvest a hefty stream of extra revenue by imposing a levy on Internet purchases nationally. Any of the profits, including Amazon and eBay, will come from the main online retailing outlets. Small niche and retailers will have far less revenue. The advantages of the extra tax revenue would primarily depend on how the new funds are spent by the government.
There are cons to this also. Since Internet companies often tend to work from ambiguous areas, it can be difficult and time-consuming for regulators to implement these laws and locate the nexus, which is the state or principality in which the company considers itself as affiliated in geographical terms. As is the case with Walmart, major corporations with activities based on a degree of openness do not suffer from difficulty in creating a nexus.
Finally, it can be concluded that the sales-tax-free atmosphere that abounds today promotes Internet sales. The tax-free Internet sales environment allows buyers to buy products from outside the state in the U.S, to exercise an additional sense of personal sovereignty by making transactions that are unrestrained by geographic location restrictions, and to extend more vigilance when searching for product quality.
References:
[1] Fuller, J. (2008b). What is the Internet Tax Freedom Act? [online] HowStuffWorks. Available at: https://money.howstuffworks.com/personal-finance/personal-income-taxes/internet-tax-freedom-act.htm [Accessed 4 Feb. 2021].
[2] Lukas, A. (1999). Should Internet Sales Be Taxed? [online] Cato Institute. Available at: https://www.cato.org/commentary/should-internet-sales-be-taxed [Accessed 4 Feb. 2021].
[3] Dunn, J. (2018). Online Sales Tax in 2018 for Ecommerce Businesses [Nexus by State]. [online] The BigCommerce Blog. Available at: https://www.bigcommerce.com/blog/ecommerce-sales-tax/#undefined [Accessed 4 Feb. 2021].
[4] Sales Tax Institute. (n.d.). Didn’t the Internet Tax Freedom Act (ITFA) ban taxes on sales over the Internet? [online] Available at: https://www.salestaxinstitute.com/sales_tax_faqs/internet_tax_freedom_act_itfa_ban_sales_taxes#:~:text=No. [Accessed 4 Feb. 2021].
[5] worldpopulationreview.com. (n.d.). States With Internet Sales Tax 2021. [online] Available at: https://worldpopulationreview.com/state-rankings/states-with-internet-sales-tax [Accessed 4 Feb. 2021].
[6] Drenkard, S. (2016). A Very Short Primer on Tax Nexus, Apportionment, and Throwback Rule. [online] Tax Foundation. Available at: https://taxfoundation.org/very-short-primer-tax-nexus-apportionment-and-throwback-rule/ [Accessed 4 Feb. 2021].
[7] Findlaw. (2019). Do You Have to Pay Sales Tax on Internet Purchases? [online] Available at: https://www.findlaw.com/smallbusiness/business-taxes/do-you-have-to-pay-sales-tax-on-internet-purchases.html [Accessed 4 Feb. 2021].
[8] Murray, J. (2019). Who Must Pay Internet Sales Tax? What Is the Law? [online] The Balance Small Business. Available at: https://www.thebalancesmb.com/internet-sales-tax-what-is-the-law-4164865#s-dakota-v-wayfair-background [Accessed 4 Feb. 2021].
[9] Supreme Court of the United States. “SOUTH DAKOTA v. WAYFAIR, INC., ET AL:. No. 17–494.” Page 26. [Accessed 4 Feb. 2021].
[10] Supra no.3
){kind=link}
0 Comments