Modifying Apportionment Rules for E-Commerce

Tax Professionals' Resource
May 30, 2012 — 1,459 views  
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In the 1992 case of Quill Corporation v. North Dakota, the U.S. Supreme Court held that states cannot compel e-commerce companies to collect sales tax if the companies have an insufficient physical presence in the state where the purchaser lives. Even so, many states have continued trying to impose sales tax on online sales of goods and services. Unfortunately, tax law and apportionment rules have not kept up with the pace of e-commerce.

States like Colorado have floated laws in an attempt to collect sales taxes from big e-commerce companies, like Amazon, when their affiliates have a physical presence within the state’s borders. To avoid taxation, Amazon simply disassociates itself with the affiliate, resulting in no sales tax collected and a catastrophic loss of revenue for the affiliate. One solution for modifying apportionment rules is for the federal government to collect a federal sales tax on e-commerce transactions. Theoretically, the federal government could then apportion the tax between the states according to U.S. Census data.

However, while census data reflects the distribution of the population, it does not necessarily reflect the areas of concentration for transactions. A rural area where access to brick and mortar stores is scarce and population is sparse, for instance, may produce a large number of e-commerce transactions. Still, because its population is small, the area would not receive a fair apportionment of sales tax if the allotment is based on census data.

David Gamage and Devin Heckman of the Berkeley University School of Law have argued that in its way, Quill provides the perfect framework for understanding apportionment rules. In a paper published in August 2011, the authors argue that e-commerce transactions only burden interstate commerce when the out-of-state vendor incurs costs associated with collecting state taxes. In other words, states could constitutionally collect taxes as long as they reimburse the out-of-state vendor for the compliance and reporting costs.

The first apportionment rules in the United States were designed based on property tax. For example, as railroads moved through individual states, the railroads were taxed based on the value of the land that they purchased for construction. Also, while many organizations have suggested model apportionment rules, states are under no obligation to adopt those rules. As a result, a unified strategy regulating apportionment rules for e-commerce will be tough to develop in the current environment.

Tax Professionals' Resource