Tax Laws

The general analytical and legislative view is that sales tax is a consumption tax.  These taxes should be charged where the goods are delivered or used, as opposed to where the goods are manufactured or sold.  This is a key fact where retailers on the Internet calculate and collect taxes.

Currently, retailers are only required to collect sales taxes in states where they have nexus to a state.  Webster’s College Dictionary defines nexus as “a means of connection; tie; link” (Costello).  As applied by governments to determine sales tax, a company must have a physical connection, or nexus, to a state in order to collect a tax.  Depending on a state’s law, this could be as little as one sales person working out of their home.

While states may wish to tax all purchases coming into their state, they may not.  As quoted from The Constitution of the United States, Article I, Section 8, “The Congress shall have power … To regulate commerce with foreign nations, and among the several states…”.  From Section 9 of the same Article “No tax or duty shall be laid on articles exported from any state” (Library of Commerce).  The Supreme Court, with the Quill decision, upheld the laws that prevent one state from reaching into another to collect taxes (Swanson, 2001).

The Internet Tax Freedom Act was passed in 1998 and extended in 2001.  It prohibited states from collecting Internet specific taxes on e-commerce transactions.  The 1992 decision by the Supreme Court forbids states from collecting taxes unless there is a significant presence, or nexus, in that state (Garretson, 2001).

Some people feel the moratorium on taxes is actually a way for the federal government to force state and local governments to invest in Internet retailers, regardless of whether they want to.  Michael E. Porter in his paper Strategy and the Internet wrote “Governments have also subsidized on-line shopping by exempting it from sales tax” (Porter, 2001).  It seems the government, by disallowing taxes, feels they are the great benefactor of Electronic Commerce, without actually paying or losing a cent.

Working the Laws

Corporations tend to do several things in order to take advantage of the laws to their best advantage. has a large customer base in California.  In order to provide products free of taxes to that large customer base, they do not have any warehouse or other physical presence in that state.  Instead, Amazon locates its west coast facility in Nevada, where a much smaller portion of its customers reside (Yegyazarian, 2002).

Click and mortar companies, such as Barnes & Noble, set up separate corporations for their Internet sales in order to avoid nexus in every state where they have a store.  By setting up a separate corporation, only collects sales taxes in the states where the “dot com” has a physical operation. is very informative with their tax information, if not also working the best they can to avoid the collections in as many places as possible.  From the help pages we learn “In accordance with applicable state law, we are required to charge sales tax in states where Barnes & has operations.”  Currently, only collects sales taxes in New York, New Jersey, Tennessee and Nevada (, 2002).

Politicians also work the laws to their advantage.  The Internet Tax Freedom act was a significant issue in the last presidential election.  All the candidates, Democrats, Republicans and others, made their opinions known.  As with any election, candidates wanted to appeal to as many constituents as possible while not committing to any actual action.

Democrat Al Gore was a candidate that supported both the ban on an Internet tax and revenues to states.  As quoted in the USA Today, Mr. Gore stated that he is “committed to finding a solution to this issue that will allow the Internet and e-commerce to flourish, but without stripping states and localities of the revenue they need to educate our children and fight crime”  (USA Today, 2000).

Some candidates simply wanted to ponder the issue further, such as Republican and now President George W. Bush and Reform Party candidate Pat Buchanan.  President Bush, was quoted as saying ”I support the current moratorium on Internet sales taxes and would extend it for several more years to determine the full impact of e-commerce on our society.”  Mr. Buchanan concurred stating ”We should have a five-year moratorium on federal taxes on Internet sales and e-commerce to let this business develop. Today, as a share of retail sales, Internet sales are tiny. Let them grow.” (USA Today)  Time for study, also interpreted as a lack of action, was the consistent theme.

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