So Amazon, after lengthy negotiations, has finally agreed that it will collect and remit sales tax on items shipped to Massachusetts customers beginning late next year. It has long been established that if a retailer maintains a “physical presence” in a state, it may be required to collect that state’s sales tax, and Amazon now has a couple of facilities in Massachusetts, possibly with more on the way.
The bigger question here, of course, is whether the “physical presence” test makes any sense in this age of online retailing. The test derives from a slew of confusing and at times contradictory Supreme Court cases going back well over half a century that attempted to deal, first, with traveling salesmen, then with the question of transporting goods made out-of-state, then with mail-order businesses, and most recently (1992) with the dramatic increase in mail-order businesses over the last time the Court had faced the issue (1967). Through that morass of cases has emerged the following “bright-line rule”: there is
a safe harbor for vendors “whose only connection with customers in the [taxing] State is by common carrier or the United States mail.” …[S]uch vendors are free from state imposed duties to collect sales and use taxes.
The basis of that rule is the so-called “dormant Commerce Clause,” that is, the judge-made rule that the Commerce Clause not only authorizes Congress to regulate interstate commerce, but also by negative implication disables states from burdening it.
Now, of course, online retailing has created a new “connection with customers” that none of the previous cases could have foreseen. Unlike mail-order houses, which targeted customers by mailing catalogues to some residents of a state, an online retailer makes its entire inventory readily available to every resident of a state that has access to the internet.
I would not be embarrassed to argue in court that, despite the “bright-line rule” of current Supreme Court cases, an online retailer with no “physical presence” in a state but with a website to which virtually every resident of a state has access may constitutionally be compelled to collect and remit sales tax on purchases made by that state’s residents. And perhaps Massachusetts or some other state will bring that case against Amazon or some other online retailer.
But the much better solution is for Congress to solve this problem once and for all by authorizing states to collect sales tax on online purchases. The dormant Commerce Clause cases are unusual in that they are both constitutional (as opposed to statutory) but also subject to congressional revision. As the Supreme Court has noted,
No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions…. Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.
The proliferation of online retailers like Amazon has created a real problem for states. Many billions of dollars of sales transactions are now conducted in a manner that was inconceivable only a few years ago, and because of a legal doctrine that has failed to keep up with advances in technology, they are conducted free of sales tax, costing states a staggering amount of money. Of course, the online exemption from sales tax has also proven extremely troublesome for “brick and mortar” retailers, who, because they must collect sales tax, are in effect selling the same products for more money – rarely a winning competitive strategy. Congress could solve this problem simply by giving states permission to do what they have always done: apply their sales tax to stuff that their residents buy. It’s high time Congress did so.