Emory Corporate Governance and Accountability Review

What Is Fair? A Discussion of Federal and State Regulation of Online Businesses
Brian Hawthorne Emory University School of Law, J.D. Candidate, 2018; Candidate for the Board, Emory Corporate Governance and Accountability Review; Secretary, Emory Chapter of the Black Law Student’s Association; B.A. Political Science, Howard University. I would like to thank everyone who assisted me in the preparation and editing of this piece.

Many states are now increasing their pressure on Congress to regulate online businesses. Under the Commerce Clause, states are prohibited from imposing mandatory sales and use taxes on businesses without an in-state physical presence. 1Quill Corp. v. North Dakota, 504 U.S. 298, 308 (1992). Unlike common “brick and mortar” stores, online businesses do not have an in-state “physical presence.” Therefore, they are not subjected to collecting state sales and use taxes. 2Direct Marketing. Ass’n v. Brohl, 814 F.3d 1129, 1132 (10th Cir. 2016). Many states believe that these tax-breaks allow out-of-state sellers to “take advantage of the local customer base” without adding to the states’ sales or use tax base. 3Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/. Additionally, since many remote retailers do not have to account for these state taxes, many “brick and mortar” stores view the tax-breaks given to online businesses as an “unfair price advantage.” 4Id.

There have been several Congressional responses to the states’ plea for fairness within the market. 5See id. These include: (1) the Market Place Fairness Act; (2) The Remote Transactions Parity Act; (3) The No Regulation Without Representation Act; and (4) the Online Sales Simplification Act. 6Id. See also Kelly P. Erb, Goodlatte Introduces Revamped Internet Sales Tax Proposal, Forbes, (Oct. 3, 2016, 9:07 PM), http://www.forbes.com/sites/kellyphillipserb/2016/09/08/goodlatte-introduces-revamped-internet-sales-tax-proposal/#549961fc7a50. However, this perspective proposes that states create notice and reporting procedures for online businesses that allow states to collect sales and use taxes from their citizens without requiring online businesses to do so. Before examining these responses, this perspective will first discuss the historical lack of federal regulation of the internet via an analysis of public policy and the Commerce Clause.

I. Historical Lack of Federal Regulation

The success of the internet is no accident. 7Jason Oxman, The FCC and the Unregulation of the Internet 3 (July, 1999), https://transition.fcc.gov/Bureaus/OPP/working_papers/oppwp31.pdf. The internet’s success is largely attributed to “market forces driving the internet’s growth” and the federal government’s creation of a “deregulatory environment” for the internet to flourish. 8Id. The public policy reasons for the federal government’s deregulatory approach are outlined below:

A. Public Policy

In 1997, the federal government recognized its important role in the regulation of and growth of electronic commerce. In a 1997 Presidential Directive, President Clinton detailed the way the internet has transformed modern business practices. 9Office of the Press Secretary, Exec. Office of the President, Memorandum for the Heads of Executive Departments and Agencies (July 1, 1997), http://clinton4.nara.gov/WH/New/Commerce/directive.html.

President Clinton emphasized two important points: (1) through its actions, the federal government can either “facilitate electronic trade or inhibit it;” and (2) “[k]nowing when to act . . . and when not to act,” is “crucial to the development of electronic commerce.” 10Id. President Clinton subsequently found that, in order “[f]or electronic commerce to ‘flourish, the private sector must lead’” and the federal government should promote “industry self-regulation” and support “private sector efforts to develop technology and practices that facilitate the growth and success of the Internet.” 11Id.

In particular, the Directive noted that the following advancements have been made possible through the internet: (A)”entrepreneurs are able to start new businesses more easily by accessing the Internet’s worldwide network of customers;” (B) “the Internet dramatically lowers costs and facilitates new types of commercial transactions;” (C) “businesses can work more efficiently with their suppliers and customers;” and (D) “consumers have greater choice and can shop in their homes for a wide variety of products from manufacturers and retailers all over the world, and they will be able to view these products on their computers or televisions, access information about the products, and order and pay for their choices, all from their living rooms.” 12Id.

B. The Commerce Clause

In addition to the aforementioned public policy concerns, courts have recognized that electronic commerce is subject to Article I, § 8, cl. 3 of the United States Constitution. 13Quill, 504 U.S. at 309. See also Brohl, 814 F.3d at 1132. The most recent leading authority for cases involving businesses without an in-state physical presence and state taxes is Quill Corp. v. North Dakota, 504 U.S. 298 (1992). 14Lila Disque & Helen Hecht, Beyond Quill and Congress: The Necessity of Sales Tax Enforcement and the Invention of a New Approach, 65 Am. U. L. Rev. 1163, 1174 (2016). In Quill, the United States Supreme Court held that, although the Due Process clause “does not bar enforcement of that State’s use tax,” states are prohibited from imposing mandatory sales and use taxes on businesses without an in-state physical presence. 15Quill, 504 U.S. at 308. The Court stated:

the Commerce Clause and its nexus requirement are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy . . . Accordingly . . . a corporation may have the “minimum contacts” with a taxing State as required by the Due Process Clause, and yet lack the “substantial nexus” with that State as required by the Commerce Clause. 16Id. at 312–13.

Quill applies to online businesses because, similar to the mail-order retailers at issue in the case, online businesses do not have an in-state physical presence. 17Brohl, 814 F.3d at 1132. However, the Court noted that its decision was “made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.” 18Quill, 504 U.S. at 318.

II. Congressional Responses

There have been several pieces of proposed legislation in response to the backlash that Congress has received from states.

(1) The Market Place Fairness Act (MFA). The Marketplace Fairness Act is a proposed legislation that is destination sourced (the sales tax rate is determined by the location of where the buyer receives the product or service). For states who have joined the Streamlined Sales and Use Tax Agreement (SSUTA), the MFA gives those states authority to “compel online and catalog retailers (“remote sellers”), no matter where they are located, to collect sales tax at the time of a transaction.” However, states will only be given this authority after they have simplified their sales tax laws. 19The Market Place Fairness Act, S. 698, 114th Cong. (2015), https://www.congress.gov/bill/114th-congress/senate-bill/698.

(2) The Remote Transactions Parity Act (RTPA). Similar to the Market Place Fairness Act, the Remote Transactions Parity Act authorizes states in compliance with the SSUTA to require all remote sellers not qualifying for the small remote seller exception to collect sales and use taxes. Under the RTPA states will also have to simplify their sales tax laws. However, the RTPA differs from the MFA with regard to the small seller exception, audit limitations, and certain provisions relating to certified software providers. 20Remote Transactions Parity Act, H.R. 2775, 114th Cong. (2015), https://www.congress.gov/bill/114th-congress/house-bill/2775. See also Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

(3) The No Regulation Without Representation Act. In contrast to the previous two proposed legislations, the No Regulation Without Representation Act seeks to codify the rule from Quill. 21No Regulation Without Representation Act, H.R. 5893, 114th Cong. (2016), https://www.congress.gov/bill/114th-congress/house-bill/5893.

(4) The Online Sales Simplification Act. Although the Online Sales Simplification Act has not been introduced, it proposes that “a state may impose a sales, use or similar tax on a seller, or impose on a seller an obligation to collect such a tax imposed on a purchaser, with respect to a remote sale of a product or service only if; (1) the State is the origin State for the remote sale; (2) the tax is applied using the origin State’s tax base applicable to non-remote sales; and (3) the State participates in the State tax clearinghouse.” 22Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

Each of the aforementioned proposed pieces of legislation has varying amounts of support around them. 23Id. However, several online businesses are hoping to continue to benefit from the current structure. 24Who supports the Marketplace Fairness Act?, MarketplaceFairness.org, http://marketplacefairness.org/support/ (last visited October 26, 2016). It is possible that if online businesses are subjected to tax compliance and liability risks in states where they “merely have customers,” they will be “less likely to expand their reach into those states.” 25The Proper Role of Congress in State Taxation: Preventing Harm to the National Economy: Hearing on “Tax Reform: What It Means for State and Local Tax and Fiscal Policy” Before the S. Comm. on Fin., 112th Cong. 5 (2012) (statement of Joseph Henchman, Vice President, Legal & State Projects, Tax Foundation) http://taxfoundation.org/sites/taxfoundation.org/files/docs/henchman_statement_senate_finance_april%2025%202012.pdf. However, many other businesses, especially “brick and mortar” stores, are concerned that tax-breaks, in conjunction with other factors, will place certain online businesses in a position to have a monopoly power. 26Joe Nocera, Amazon Plays Rough. So What?, N.Y. Times, Oct. 13, 2014, http://www.nytimes.com/2014/10/14/opinion/joe-nocera-amazon-plays-rough-so-what.html.

III. Colorado’s Potential Solution

Colorado has developed a potential solution that may benefit states while allowing online businesses to continue their operations without collecting state sales and use taxes. Recently, the 10th Circuit has upheld a Colorado law that imposed notice and reporting procedures on out-of-state retailers. 27Brohl, 814 F.3d at 1132. Under this regime, out-of-state retailers are required to do three things:

(1) send transactional notices to purchasers informing them that they may be subject to Colorado’s use tax; 28Id. at 1133.

(2) send Colorado purchasers who buy goods from the retailer totaling more than $500 an “annual purchase summary” with the dates, categories, and amounts of purchases; 29Id. and

(3) send the Department an “annual customer information report” listing their customers’ names, addresses, and total amounts spent. 30Id.

Through these procedures, Colorado was able to more effectively collect use taxes from its citizens without requiring out-of-state retailers to do so. 31Id. Such notice and reporting procedures are an effective compromise between states and online businesses. Therefore, this perspective proposes that states create notice and reporting procedures for online businesses similar to those Colorado uses. However, unless online businesses and states are willing to come together to create legislation that will benefit all parties, it seems unlikely that a resolution will come in the near future. 32Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

Footnotes

1Quill Corp. v. North Dakota, 504 U.S. 298, 308 (1992).

2Direct Marketing. Ass’n v. Brohl, 814 F.3d 1129, 1132 (10th Cir. 2016).

3Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

4Id.

5See id.

6Id. See also Kelly P. Erb, Goodlatte Introduces Revamped Internet Sales Tax Proposal, Forbes, (Oct. 3, 2016, 9:07 PM), http://www.forbes.com/sites/kellyphillipserb/2016/09/08/goodlatte-introduces-revamped-internet-sales-tax-proposal/#549961fc7a50.

7Jason Oxman, The FCC and the Unregulation of the Internet 3 (July, 1999), https://transition.fcc.gov/Bureaus/OPP/working_papers/oppwp31.pdf.

8Id.

9Office of the Press Secretary, Exec. Office of the President, Memorandum for the Heads of Executive Departments and Agencies (July 1, 1997), http://clinton4.nara.gov/WH/New/Commerce/directive.html.

10Id.

11Id.

12Id.

13Quill, 504 U.S. at 309. See also Brohl, 814 F.3d at 1132.

14Lila Disque & Helen Hecht, Beyond Quill and Congress: The Necessity of Sales Tax Enforcement and the Invention of a New Approach, 65 Am. U. L. Rev. 1163, 1174 (2016).

15Quill, 504 U.S. at 308.

16Id. at 312–13.

17Brohl, 814 F.3d at 1132.

18Quill, 504 U.S. at 318.

19The Market Place Fairness Act, S. 698, 114th Cong. (2015), https://www.congress.gov/bill/114th-congress/senate-bill/698.

20Remote Transactions Parity Act, H.R. 2775, 114th Cong. (2015), https://www.congress.gov/bill/114th-congress/house-bill/2775. See also Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

21No Regulation Without Representation Act, H.R. 5893, 114th Cong. (2016), https://www.congress.gov/bill/114th-congress/house-bill/5893.

22Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, Bloomberg BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

23Id.

24Who supports the Marketplace Fairness Act?, MarketplaceFairness.org, http://marketplacefairness.org/support/ (last visited October 26, 2016).

25The Proper Role of Congress in State Taxation: Preventing Harm to the National Economy: Hearing on “Tax Reform: What It Means for State and Local Tax and Fiscal Policy” Before the S. Comm. on Fin., 112th Cong. 5 (2012) (statement of Joseph Henchman, Vice President, Legal & State Projects, Tax Foundation) http://taxfoundation.org/sites/taxfoundation.org/files/docs/henchman_statement_senate_finance_april%2025%202012.pdf.

26Joe Nocera, Amazon Plays Rough. So What?, N.Y. Times, Oct. 13, 2014, http://www.nytimes.com/2014/10/14/opinion/joe-nocera-amazon-plays-rough-so-what.html.

27Brohl, 814 F.3d at 1132.

28Id. at 1133.

29Id.

30Id.

31Id.

32Jennifer McLoughlin, A Primer: The Congressional Battle Over Digital Sales Tax, BNA, (Oct. 3, 2016, 8:51 PM), http://www.bna.com/primer-congressional-battle-n57982077192/.

Emory University School of Law, J.D. Candidate, 2018; Candidate for the Board, Emory Corporate Governance and Accountability Review; Secretary, Emory Chapter of the Black Law Student’s Association; B.A. Political Science, Howard University. I would like to thank everyone who assisted me in the preparation and editing of this piece.