Internet Taxes Michael I. Shamos, Ph.D., J.D. Institute for Software Research School of Computer Science Carnegie Mellon University LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Michael Faraday describing electricity to a politician: “Sir, I do not know what it is good for. But of one thing I am quite certain, some day you will tax it.” SOURCE: SUZETTE BARTA LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Purpose of Taxes Raise revenue Implement policy (encourage/discourage activities) e.g., cigarette tax, gasoline tax Political implications Politicians want (need) taxes But: don’t want their own citizens to pay them Favor “invisible” taxes (not paid by their voters) Over 20,000 taxing jurisdictions in the U.S. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Sales Tax v. Use Tax Sales tax: tax on the sale price of tangible goods or of services Collected from the customer by the merchant, paid by merchant to the state Use tax: tax on use of tangible property within a state, even if the sale did not occur there Property purchased outside a state but used in state requires payment of use tax Business pay use taxes; consumer usually evade them LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Use Tax Example “an excise tax is hereby levied on the storage, use, or other consumption in this state of tangible personal property or the benefit realized in this state of any service provided.” Ohio Rev. Code §5741.02 “Tangible personal property or services rendered upon which taxes have been paid to another jurisdiction [shall be reduced by] the amount of the tax paid to such other jurisdiction.” LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Legal Authority for Taxes “Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.” U.S. Const., Art. 1 §8, clause 1. “No Tax or Duty shall be laid on Articles exported from any State.” U.S. Const., Art. 1 §9, cl. 5. “No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports” U.S. Const., Art. 1 §10, cl, 2. (Sp. Ct. 1869: only applies to foreign commerce. Now questionable.) Or lay an any Duty of Tonnage. Art. 1 §10, cl, 3. “Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” U.S. Const., Amendment 16. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Tax Definitions Bit tax. Tax on electronic commerce measured by the volume of digital information transmitted electronically. Capitation. A tax imposed on an individual without regard to goods, services or income Duty. Usually, a tax imposed on imports into a country Excise. A tax based on the value of services or property other than real estate, levied on the home market. Goods and services tax (GST). VAT on goods and services Impost. Old word for a tax, now usually an import duty. Sales tax. Tax on sales collected for the gov’t by a merchant Tariff. Tax on the value of imported goods. Use tax. Tax on the privilege of using goods within a jurisdiction Value-added tax (VAT). Indirect tax on consumption assessed on the increased value of goods at each point in the chain of production and distribution. Collected from the end user. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Collection of Tax National Bellas Hess, Inc. v. Dep’t of Revenue of Illinois, 386 U.S. 753 (1967) Hess was a mail order house in Missouri and Delaware. It sold significant amounts of goods to consumers in Illinois. Illinois ruled that Hess had to collect use taxes for Illinois Supreme Court: “If Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes.” One state cannot force another to collect its taxes LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Collection of Tax Quill Corp. v. North Dakota Tax Comm’r., 504 U.S. 298 (1992) Quill had presence in Delaware, Illinois, California, and Georgia North Dakota required Quill to collect use taxes for North Dakota North Dakota Supreme Court found Hess to be obsolete based on “remarkable growth of the mail order business” U.S. Supreme Court: Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well. The clause ... prohibits certain state actions that interfere with interstate commerce North Dakota cannot force Quill to collect the tax LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Collection of Tax No State … shall have power to impose … a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State … are … (1) the solicitation of orders … in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State … 15 U.S.C. §381 One state can’t tax a foreign corporation’s income from sales on orders solicited in that state LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Who Has the Right to Tax in Cyberspace? A tax is valid only if the activity taxed has a “substantial nexus” to the taxing state. (Due process.) State must have jurisdiction over the transaction and the taxpayer Can Pennsylvania tax an amazon.com transaction with a Pennsylvania consumer? Can it force the consumer to pay use tax? Can it force amazon.com to collect the use tax? LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Eroding Tax Base Ecommerce transactions generate little tax Many are interstate More electronic goods Many are unmonitored, unaudited Underground economy: barter, auctions Unfairly high cost to local merchants Total tax base is eroding Proposed solutions: Value-added tax Communications (bit) tax National sales tax LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Taxation Tax law deals with services (rendered by physical people) and physical goods. When goods are electronic, problems arise. All state that have sales tax (45) charge tax on Internet sales of goods. (No sales tax in New Hampshire, Oregon, Massachusetts, Alaska, and Delaware) Most states charge sales tax on downloaded software A small number of states charge sales tax on downloaded data (content) Ten states tax Internet access. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

St. Tammany Parish Tax Collector v. Barnesandnoble.com Barnesandnoble.com has no physical presence in St. Tammany Parish, Louisiana Barnes and Noble, a sister company of bn.com, has a retail bookstore in Tammany Parish If a book was out of stock at Barnes and Noble, it placed an order for the customer at bn.com Barnes & Noble and bn.com sold gift cards usable at both Barnes & Noble and bn.com Books bought on bn.com could be returned for credit at Barnes & Noble LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

St. Tammany Parish Tax Collector v. Barnesandnoble.com Barnes & Noble, Inc. owns 100% of bn.com and Barnes & Noble Booksellers, which operates the retail stores The St. Tammany Parish Tax Collector sued Barnes & Noble and bn.com for failure to collect sales tax on bn.com transactions The Court held that bn.com did not have sufficient nexus with the Parish to allow taxation: “The existence of a close corporate relationship between companies and a common corporate name does not mean that the physical presence of one is imputed to the other.” Court: there was no revenue to bn.com from the bookstore returns LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Internet Tax Freedom Act In 1998, when the Internet boom was in full swing, Congress worried that e-commerce would be stifled by new taxes It enacted the Internet Tax Freedom Act to maintain a haven for this growing sector. It prohibited New taxes on Internet access (old ones OK) Multiple or discriminatory taxes on e-commerce (except for material “harmful to minors”) Original term: Oct. 1, 1998 - Sept. 30, 2001 Extended to Nov. 1, 2003, then Nov. 1, 2007 Extended again to Dec. 11, 2014, then Dec. 11, 2015 FINALLY MADE PERMANENT IN FEB. 2016 LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Discriminatory Internet Tax One that is imposed on Internet sales but not ordinary sales Allowing sales tax to be collected from an e-store by multiple states for a single transaction Multiple tax: tax on an Internet sale over and above a regular sales tax LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Internet Tax Amendments of 2007 INTERNET ACCESS- (A) a service that enables users to connect to the Internet to access content, information, or other services offered over the Internet; (B) includes the purchase, use or sale of telecommunications (i) to provide such service; or (ii) to otherwise enable users to access content, information or other services offered over the Internet; (C) includes services incidental to the provision of the service described in subparagraph (A) when furnished to users as part of such service, such as a home page, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity; LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Internet Tax Amendments of 2007 INTERNET ACCESS (D) does not include voice, audio or video programming, or other products and services (except services described above) that utilize Internet protocol or any successor protocol and for which there is a charge, regardless of whether such charge is separately stated or aggregated with the charge for services described above and (E) includes a homepage, electronic mail and instant messaging (including voice- and video-capable electronic mail and instant messaging), video clips, and personal electronic storage capacity, that are provided independently or not packaged with Internet access. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Internet Tax Amendments of 2007 ‘tax on Internet access’ does not include a State tax expressly levied on commercial activity, modified gross receipts, taxable margin, or gross income of the business, by a State law specifically using one of the foregoing terms, that— (I) was enacted after June 20, 2005, and before November 1, 2007; (II) replaced, in whole or in part, a modified value-added tax or a tax levied upon or measured by net income, capital stock, or net worth; (III) is imposed on a broad range of business activity; and (IV) is not discriminatory in its application to providers of communication services, Internet access, or telecommunications. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Amazon and California Amazon claimed to have no nexus to California Amazon has “affiliates” in California – web sites that refer sales to Amazon.com User visits referrer site, sees that a book is for sale, clicks link User is taken to Amazon’s site, orders book Amazon ships from outside California Amazon pays the referrer a fee (commission) Amazon does not collect sales tax on purchases shipped into California California passed a law in 2011 to require collection of sales tax in these circumstances LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Amazon and California In July 2011, California passed a new law requiring certain out-of-state companies to collect sales tax. It includes “Any retailer having any representative, … , [or] independent contractor … in California under the authority of the retailer or its subsidiary for … selling, or … taking of orders for any tangible personal property.” The would require Amazon, because of its California affiliates, to collect sales tax on ALL sales made to California (not just sales through its affiliates) Amazon does not want to collect the tax Amazon sponsored a proposed vote to repeal the tax LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Amazon and California Amazon sent termination notices to its 10,000 California affiliates On September 23, 2011: California and Amazon settled California will postpone enforcement for 1 year. Amazon will then start collecting sales tax California will lose $200 million Amazon will hire 10,000 workers in California and build distribution centers LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Amazon Amazon is building distribution centers around the country to speed up deliveries It has to collect tax in at least those states Now collects tax in 45 states and the District of Columbia. Not Alaska, Delaware, Montana, New Hampshire, Oregon. Why? Those are the five states that have no sales or use tax. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Marketplace Fairness Act of 2017 (proposed, not yet enacted) “remote sale” = sale of goods or services into a state where seller would not now be required to pay or collect local sales/use tax Applies to businesses with $1 million or more in sales Requires compliance with the Streamlined Sales and Use Tax Agreement of 2002 LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Marketplace Fairness Act of 2013 Simplification Requirements State must designate a single entity responsible for all State and local sales and use tax administration Provides for a single audit of a remote seller for all State and local taxing jurisdictions within a State A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration in each State. State may not require a remote seller to file sales and use tax returns any more frequently than returns are required for non-remote sellers Some version of this bill is likely to pass LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Remote Transaction Parity Act (Introduced April 2017, not yet enacted) A State that is not a Member State under the Streamlined Sales and Use Tax Agreement may require all remote sellers not qualifying for the small remote seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that State, but only if the State adopts and implements the minimum simplification requirements, including a single entity within the State responsible for all State and local sales and use tax administration, return processing, and audits for remote sales sourced to the State. Small remote seller: $10M (1st yr.), then 5M, then 1M LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS States’ New Approach If the Internet retailer cannot be forced to collect tax, have them identify state residents who bought goods over the Internet and what they bought Then the state can impose use tax North Carolina court: First Amendment protects a buyer from the government demanding to know the books, music, and audiovisual products they've bought. Amazon.com v. Lay (W.D. Wash., Oct. 25, 2010) U.S. Supreme Court: Direct Marketing Association v. Brohl (Mar. 3, 2015). Suit can be brought in Federal courts to enjoin reporting requirements. And: the Quill holding should be re-examined. LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

Direct Marketing Association v. Brohl Colorado enacted a merchant reporting statute that applied to out-of-state merchants who did not collect Colorado sales taxes but shipped goods to Colorado (“noncollecting retailers”): 39 Clo. Rev. Stat. 21-112.3.5(d)(I)(A): “Each retailer that does not collect Colorado sales tax shall file an annual statement for each purchaser to the department of revenue on such forms as are provided or approved by the department showing the total amount paid for Colorado purchases of such purchasers during the preceding calendar year or any portion thereof, and such annual statement shall be filed on or before March 1 of each year.” LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Tax Injunction Act At issue in Direct Marketing Association v. Brohl was the Tax Injunction Act (“TIA”), 28 U.S.C. §1341: “The district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” A unanimous Supreme Court (rare) ruled that the TIA did not remove subject matter jurisdiction from the federal courts over transaction reporting as required by Colorado. Enjoining “reporting” would not “restrain the assessment, levy or collection of any tax.” LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Major Ideas Taxation is largely geographical The Internet is not geographical, hence causes problems in tax collection A state may not be forced to collect taxes for another state; hence many Internet transactions do not incur ordinary sales taxes Self-reported use taxes are impossible to collect To prevent states from attempting to use the Internet to raise revenue, Congress repeatedly extended the Internet Tax Freedom Act, now permanent LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS

LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS Q A & LAW OF COMPUTER TECHNOLOGY FALL 2017 © 2017 MICHAEL I. SHAMOS