Sales Tax, unconstitutional?

By Charles Hwang

Reviewed by Jennifer Williams

If you’ve ever purchased anything using the Internet, there’s a good chance you bought something from If you are a loyal user like me, you may have even grown accustomed to not paying taxes on most of your purchases, I know I have. Have you ever wondered why you pay taxes on certain items and on others you don’t?

According to Jeff Bezos: “…the Constitution prohibits states from interfering in interstate commerce. And there was a Supreme Court case decades ago that clarified that businesses — it was mail-order at that time because the Internet did not exist — that mail-order companies could not be required to collect sales tax in states where they didn’t have what’s called “nexus.” The case Mr. Bezos is referring to is Quill Corp. v. North Dakota, 504 U.S. 298 [1992])

In Complete Auto Transit v. Brady, 430 U.S. 274 [1977]), the Court created a four-prong test, which Quill Corp. applies to mail-order business, to determine the constitutionality of a tax under the Commerce Clause. The four prongs are as follows: (1) Substantial Nexus; (2) Nondiscrimination; (3) Fair Apportionment; and (4) Fair relationship to services provided by the state. The ‘nexus’ that Mr. Bezos is referring to is a connection between a state and a potential taxpayer clear enough to impose a tax. In this case, Mr. Bezos is relying on the decision in Quill Corp. arguing that because is not present (e.g. warehouses or employees) in every state that it should not be subject to the sales tax of states where his corporation does not have a substantial nexus. 

Presumably this means that pays taxes in states where it has a nexus and doesn’t where it does not have a nexus.

Bezos is correct that, based on precedent, if does not bear a substantial nexus to certain states, it should not be subject to sales tax for transactions made to customers where does not have a physical presence. This argument may have worked at a time when the Internet was not so prevalent, but in this digital age physical presence or substantial nexus is not as clear-cut. As a result a major question is how does the nexus standard apply to the Internet? may be one of the largest ‘offenders,’ but it certainly isn’t the only one. There are numerous online retailers (e.g. Target, Wal-Mart etc.) who do not charge a sales tax based on the nexus test.

Any legal decision, likely legislative, to enact a uniform sales tax would have to base itself on several factors and not just the economic ones. For example: consumer response, Internet policy, economic, and retailer response. Because of the current economic climate, I believe that this is a decision that must be carefully considered because it may have effects that reach farther than the realm of e-commerce.


According to the July 16th, 2011 edition of The Economist, has proposed a referendum to voters to overturn California’s sales tax on online purchases. This is an interesting move by Amazon because it is likely that most consumers will not align themselves with brick-and-mortar stores like Target and Wal*Mart, but rather side with the online retailer.

The new law will force online retailers to pay sales tax to help fill California’s budget deficit. In the past, has relied on the physical nexus to avoid paying sales tax, but the new law expands the definition ofnexus by adding related companies to its definition, creating a physical nexus for any online retailer with related companies in the state. We’ll see if’s move will pay off.


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