As One Internet Tax Battle Ends, Talk of Another Heats Up

As part of a deal that led to the passage of the Internet Tax Freedom Act last month, Congress will take a fresh look at online sales-tax legislation. But state governments that have been waiting to collect taxes for more than two decades are ready to take matters into their own hands.

It’s a battle nearly as old as the internet itself. Now, thanks to a new law passed last month, the conflict is flaring up once again.

The point of contention is over the collection of sales tax by e-commerce retailers, which has long created headaches for tech companies and state governments alike, though for different reasons.

It’s getting a fresh look partly because of last month’s passage of a permanent version of the Internet Tax Freedom Act, a law that bans states from taxing internet access. The act, a rider on the customs enforcement act passed last month, is likely to generate sore feelings over the enforcement of sales taxes on goods bought over the internet.

Internet sales-tax legislation was on the table as recently as 2014, but John Boehner, then the Speaker of the House of Representatives, refused to bring the legislation to the House floor. However, The Hill reports that the Internet Tax Freedom Act deal was predicated on legislators reconsidering the Marketplace Fairness Act or a similar bill.

Not that the states that would benefit from the bill’s passage are waiting. Last month, The Wall Street Journal reported that 13 states were working to enforce online sales taxes on companies that don’t have a physical location within state borders, despite a 1992 Supreme Court decision, Quill Corp. v. North Dakota, that effectively banned the practice. Alabama Deputy Revenue Commissioner Joe Garrett said that the plan was purposely intended to set up a legal battle in an effort to overturn Quill.

“We’re confident that some remote sellers will not comply and therefore it will lead to litigation,” Garrett told the Journal. “We have been very open about what we’re doing.”

Nonetheless, the International City/County Management Association (ICMA), a trade group representing local governments, supports Congress’ decision to revisit the tax issue.

“We see this as a really important federalism issue, that the federal government respect the sovereignty of our states and local governments to establish the kind of tax authority that makes sense for them,” ICMA’s deputy executive director, Elizabeth Kellar, told FedScoop last month. “I’m still in shock after this went through so quickly.”

Meanwhile, new legal precedent on this issue is already being set. Last month, the Direct Marketing Association (DMA) was on the losing side of an appeals court ruling regarding Colorado’s “Amazon tax.” In 2015, DMA won a legal decision to fight the Colorado law in federal court, claiming the rule violated the Commerce Clause of the U.S. Constitution. But the 10th Circuit Court of Appeals disagreed with the association and pushed the case back to the state level.

In a statement, DMA argued that the ruling by the federal appeals court “challenges traditional legal thought regarding burdens on interstate commerce.”

NetChoice, an e-commerce group, says that as situations arise at the state level it will keep an eye out for its members.

“We’re worrying about the smaller sellers. Should they have to be subject to 46 state audits, and a thousand different sets of jurisdictions with different rates and rules?” NetChoice Executive Director Steve DelBianco asked CBS San Francisco.

(iStock Editorial/Thinkstock)

Ernie Smith

By Ernie Smith

Ernie Smith is a former senior editor for Associations Now. MORE

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