March 18, 2011
The Dormant Commerce Clause, E-Commerce and the First Amendment
Internet sales continue to increase as consumers take advantage of the convenience and price competition that e-commerce provides. Yet, as North Carolina and other states have learned, frequently the “lower” prices available online result from the fact that many internet retailers, such as Amazon.com, do not collect sales tax on such purchases. In fact, under United States Supreme Court precedent, a state cannot require internet retailers that lack any physical presence in a state to collect sales tax. Thus, when North Carolinians buy goods from Amazon - which has no warehouses, offices, employees, or other form of physical presence in the state - those goods appear to be cheaper than the same products bought from in-state retailers because Amazon does not collect sales tax on the transactions.
But what many consumers do not know (or choose to ignore) is that they still owe taxes on their internet purchases. These taxes, known as “use” taxes, are not collected by the remote retailers; rather, consumers are responsible for paying these taxes directly to the North Carolina Department of Revenue. The use tax applies at the same rate as the sales tax. As a result, North Carolinians should pay the same amount in taxes whether they buy goods at the local store (with the store collecting and remitting sales tax) or over the internet (with the consumer reporting the purchase and remitting use tax).
As it turns out, though, most North Carolinians are not fulfilling their use tax obligations. In fact, economists estimate that North Carolina is losing $160 to $180 million annually in unpaid use taxes from internet sales alone, with less than 4% of North Carolinians reporting any use tax owed. Nationally, the numbers are even more striking, with the total amount of uncollected state and local taxes owed on e-commerce transactions in 2010 estimated at between $8.6 billion and $9.9 billion. Given the state’s ongoing budget shortfalls, the North Carolina Department of Revenue has been actively trying to find new ways to either force internet retailers to collect taxes on internet purchases or to increase use tax compliance among consumers. In particular, in 2009, the Department of Revenue attempted a new strategy - improve use tax enforcement by requiring Amazon to provide the Department with “all information” relating to purchases that North Carolinians made between 2003 and 2010. That is, the Department of Revenue sough the identities of North Carolina purchasers and a list of the products they purchased so that the Department of Revenue could determine each purchaser’s use tax liability. Amazon refused and filed a declaratory judgment action in federal court alleging that the information request violated the First Amendment rights of its consumers. The federal district court agreed and granted summary judgment to Amazon.
This article examines that decision and explores the constitutional issues surrounding North Carolina’s efforts to increase sales and use tax compliance. In particular, we analyze (i) the First Amendment issues raised by the federal district court’s order in the Amazon case as well as (ii) the First Amendment and Commerce Clause issues that would arise if North Carolina were to enact a reporting statute requiring internet retailers to disclose to the Department of Revenue the amount of purchases that individual consumers make annually. While the Department of Revenue could use this information to better enforce the state’s use tax law, we contend that such a statute faces difficult First Amendment and dormant Commerce Clause hurdles that, although possibly avoidable, would severely limit the effectiveness of any such statute. Consequently, while we do not reject the enactment of such a tax reporting statute, we contend that the state also needs to continue pursuing alternative approaches to increase use tax compliance. Ultimately, however, the issue of use tax non-compliance may be solved only through federal legislation authorizing states to require retailers to collect sales and use tax despite their lack of an in-state physical presence.
Download the article from SSRN at the link.
March 18, 2011 | Permalink
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