Current Developing Trend of Sales Tax on E-Business

Current Developing Trend of Sales Tax on E-Business

James G. S. Yang (Montclair State University, Montclair, NJ, USA), Peter L. Lohrey (Montclair State University, Montclair, NJ, USA) and Leonard J. Lauricella (Montclair State University, Montclair, NJ, USA)
Copyright: © 2015 |Pages: 14
DOI: 10.4018/ijebr.2015040104

Abstract

This article explores the development of sales tax on e-business. It points out that the problem was rooted in the fact that the seller is required to collect and remit the tax to the buyer's state government. If the seller and the buyer do not reside in the same state, the buyer's state government has no jurisdiction over the seller, unless there is a “physical presence” of the seller in the buyer's state. A state government can require an out-of-state seller to collect sales tax from the in-state buyer only when there is “physical presence.” However, what constitutes “physical presence” can become very controversial and complex. This article discusses many court cases. As Internet commerce was incorporated into the business operations, a great many transactions were executed online. The concept of “physical presence” became even more complex, as websites and digitized products became more commonplace. A new concept of “economic nexus” has evolved under many state statutes. Now an out-of-state seller may be required to collect sales tax from an in-state buyer, regardless of “physical presence.” In 2013 the United States Senate enacted the “Marketplace Fairness Act of 2013.” This embraced the concept of “economic nexus.” This legislation could potentially end or at least greatly simplify all controversies in e-business taxation. This paper further notes that the concept of “economic nexus” may be extended to the arena of state income tax.
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“Physical Presence” To Pay Sales Tax

The “due process” has been interpreted to require a “nexus” or connection between the seller and the state. In other words, the seller has received government service from the state. In a sales transaction, if the buyer and the seller reside in the same state, it is the seller’s responsibility to collect sales tax from the buyer and remit it to the buyer’s state government, because there is a connection between the seller and the state. Thus, the minimum connection of the Due Process Clause and the substantial nexus of the Commerce Clause are clearly satisfied.

If the buyer and the seller do not reside in the same state it is the buyer’s duty to remit the amount of sales tax to his/her own state government. This is known as “use tax.” In this situation, the seller is not held responsible for collecting sales tax from the buyer, because there is no “nexus” or connection between the seller and the state. Hence, the “due process” is not satisfied.

For example, Susan, a New Jersey resident, is a garden lover. She bought flower seeds from the local Plouch Garden Center in New Jersey. She also bought vegetable seeds from Gardener Supply in Maine. How should Susan pay sales tax? Plouch should collect sales tax from Susan because Plouch has “physical presence” in New Jersey. However, Gardener Supply is not required to collect sales tax from Susan because Gardener Supply has no “physical presence” in New Jersey. Instead, Susan should voluntarily remit the due amount of “use tax” to her home state of New Jersey.

At the time the Commerce Clause was drafted the intent was to prevent the states from interfering with interstate commerce. It was easy to identify the location of the buyer and the seller, and if both resided in the same taxing jurisdiction there was no need for regulation by Congress. The interpretation requiring physical presence when buyer and seller were not in the same state made sense.

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