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, USA), Peter L. Lohrey (Montclair State University, USA) and Leonard J. Lauricella (Montclair State University, USA)
DOI: 10.4018/978-1-4666-9787-4.ch074
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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.

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.

Now, time and circumstances have changed. Today, many products can be digitized, such as software, e-books, e-games, e-music, etc. The product can be transferred from one computer to the other without knowing where the seller resides. Likewise, it may be difficult if not impossible to identify where the buyer resides. The concept of “physical presence” has encountered many problems in today’s Internet age. Here are some of the issues.

Key Terms in this Chapter

Marketplace Fairness Act of 2013: A tax act passed by the United State Senate that grants a state government authority to collect sales and use tax from remote online sellers who have no physical presence in the state.

Streamlined Sales and Use Tax Agreement: The agreement that is agreed upon by the state governments to simplify its sales and use tax administration procedure so as to encourage the remote online sellers to collect sales and use tax from the in-state buyers.

Amazon Tax: Sales tax charged by the New York State government on amazon.com for its merchandise sold to the residents in New York State.

E-Business: A business transaction conducted by means of Internet in electronic format.

Economic Nexus: The seller’s profits or benefits derived from the buyer’s state.

Physical Presence: The seller’s employees or branch office that is located in the buyer’s state.

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