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Internet Taxes

Last Updated: 2018

Sales and use taxes comprise a large portion of the revenues for state and local governments. A sales tax is imposed on the sale of goods and services within the taxing jurisdiction’s borders. A use tax is a companion to sales tax and is imposed on purchases by the residents of a jurisdiction from vendors outside that jurisdiction. In 1992, in Quill Corporation v. North Dakota, the U.S. Supreme Court ruled that state and local governments had a constitutional right to require out-out-state retailers, including internet retailers, to collect sales taxes under certain conditions.

With the rapid growth of Internet commerce in the 21st century, Internet taxes have become an attractive source of government tax revenue. The U.S. Census Bureau reports that e-commerce as a share of total retail sales has been steadily rising since 2007 and comprised 9.1% of total retail sales in the 3rd quarter of 2017. In order to impose taxes on this growing tax base, taxing jurisdictions must comply with the Permanent Internet Tax Freedom Act, the Commerce Clause of the U.S. Constitution, and the Fourteenth Amendment’s Due Process Clause.

Under the Internet Tax Freedom Act of 1998 (ITFA; P.L. 105-277), state and local governments cannot impose “multiple or discriminatory taxes on electronic commerce” or new taxes on Internet access services. Therefore, jurisdictions can administer sales and use taxes that would apply to Internet purchases as long as the tax is without regard to whether the sale was in person, by mail, or Internet. ITFA was extended in three year increments since its inception until becoming permanent law in 2015, the Permanent Internet Tax Freedom Act, with the passage of the Trade Facilitation and Trade Enforcement Act.

In addition to being non-discriminatory, Internet taxes also need to meet the “nexus” statutes according to both the dormant Commerce Clause and the Due Process Clause. States have the power to tax Internet sales from outside vendors as long as the seller has a constitutionally sufficient connection (nexus notes 1) to that state. Otherwise, the seller has no enforceable obligation to collect or remit taxes for such non-nexus state.

Generally, sales taxes are collected by vendors, whereas customers are responsible for remitting the use tax to the taxing jurisdiction. Few residents generally comply with the use tax. Therefore, the use tax revenue for the most part goes uncollected. Not surprisingly, state and local governments prefer that vendors collect taxes from consumers and rely on sales tax revenue rather than use tax revenue.

Internet sales are expected to continue to grow as online shopping replaces in-store purchases. Further, as retailers outsource and move their presence to tax-preferential locations, the nexus requirement is likely to further reduce the Internet sales taxes received by state and local governments, thereby undermining the tax base and reducing sales tax revenues. On the other hand, it is possible that altering or increasing the taxation

of Internet sales may stagnate the growth of the industry as well as the opportunities it creates for businesses, consumers, and the economy overall. The Streamlined Sales Tax Governing Board, which originated in 2000 in an effort to revisit the Quill standard, aims to simplify and modernize state sales and use tax systems. It was created by the National Governor’s Association (NGA) and the National Conference of State Legislatures (NCSL) after the passage of the ITFA. Currently, twenty four states have adopted the simplification efforts and more states are expected to follow suit.


1. Nexus or sufficient presence is created if a company has a temporary or permanent presence of personnel (employees, agents, service people, etc.) or property (offices, warehouse, inventory).


Lunder, Erika K and Pettit, Carol A (2015). “Amazon Laws and Taxation of Internet Sales: Constitutional Analysis.” Congressional Research Services Report, R42629.

The Streamlined Sales Tax Governing Board, Inc. Website. Accessed on: 01.03.2018

SEE ALSO: Dormant Commerce ClauseDue Process ClauseIntergovernmental Tax ImmunityTax CompetitionTax CoordinationTaxing and Spending Power