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Recent laws, often called “Amazon” laws in reference to the large Internet retailer, represent fresh attempts by the states to capture taxes on Internet sales. States enacting these laws have used two basic approaches. The first is to impose use tax collection responsibilities on retailers who compensate state residents for placing links on the state residents’ websites to the retailer’s website (i.e., online referrals or “click-throughs”). The other is to require remote sellers to provide sales and tax-related information to the state and/or the in-state customers. New York was the first state to enact click-through legislation, and Colorado was the first to pass a notification law. These laws have received significant publicity, in part due to questions about whether they impermissibly impose duties on remote sellers who do not have a sufficient nexus to the state.
Under Supreme Court jurisprudence, nexus is required by two provisions of the U.S. Constitution: the Due Process Clause of the Fourteenth Amendment and the Commerce Clause. The Court has held that, under the dormant Commerce Clause, a state may not impose tax collection responsibilities on an out-of-state seller that does not have a physical presence in the state. Importantly, physical presence is only required by the dormant Commerce Clause, which is subject to congressional regulation, while the Fourteenth Amendment imposes a lesser requirement. This means Congress may choose a different standard under its power to regulate interstate commerce, so long as such standard is consistent with due process. Legislation introduced in the 112th Congress—the Main Street Fairness Act (H.R. 2701 and S. 1452)—would authorize states to impose tax collection responsibilities on remote sellers once the act’s requirements relating to state adoption of the multistate Streamlined Sales and Use Tax Agreement are met. The Marketplace Equity Act of 2011 (H.R. 3179), meanwhile, would allow a state to impose tax collection responsibilities on large remote sellers once it implemented a simplified tax administration system. The Marketplace Fairness Act (S. 1832) represents a hybrid approach in that it would allow a state to impose sales and use tax collection duties on remote sellers if the state were a member under the SSUTA or had adopted minimum simplification requirements, as provided under the act.
Since Congress has not yet changed the physical presence standard under the Commerce Clause, it remains the standard by which to judge the constitutionality of the states’ “Amazon” laws. Already, both the Colorado and New York laws have been challenged on constitutional grounds. The Colorado law, which applies mainly to companies without a physical presence in the state and imposes burdens on them not imposed on in-state retailers, appears to be the more constitutionally problematic approach, and it was recently struck down by a federal district court. A state appellate court in New York, meanwhile, has rejected a claim that the New York law violates both clauses on its face, but has kept alive an as-applied challenge. The constitutionality of the New York law appears to primarily turn on whether state residents can be characterized as engaging in a constitutionally significant level of solicitation on behalf of the Internet retailer so that it can be treated as having a physical [...]