The Evolution of Internet Sales and Use Taxes

ecommerce tax
The history of ecommerce taxes
You may or may not be aware that this issue is once again before Congress, but did you know it really has its roots in the Great Depression? Here are the events and bills (some are currently in House and Senate committees) that have thus far defined ecommerce taxation:

Square One

Sales tax originated as a stopgap to save the states from heavy losses in revenue experienced when American jobs and property values took a dramatic dive in the early 1930’s. Though cumbersome and considered invasive, revenue from sales taxes began to provide badly needed funds to support local government services once financed by income and property taxes; such as highway construction and maintenance, and fire and police protection. Not all states adopted a sales tax, creating an almost immediate inequity begging for circumvention.

“Use” Taxes as a Loophole

It didn’t take rocket science for the newly taxed citizenry to realize they could easily drive across state lines to buy untaxed products and escape their resident sales taxes, especially “big ticket items.” The practice was ignored for a short time, but in 1935 the “use tax” was put into service by states that argued, “If a product was going to be used in (and impact) their state, then a tax was thereby owed.” Of course, enforcement and trackability was practically impossible. So, the states focused on charging high use taxes on more costly items, like vehicles and boats, which were already accountable due to state licensing requirements.

The Quill Decision – 1992

In Quill Corps v. North Dakota, the state and its local supreme court tried to impose a use tax on Quill. Though Quill did not have a physical present in North Dakota, it did have a software program that its North Dakota customers used to check its available inventory and place orders directly. The North Dakota Supreme Court’s decision was struck down by the U.S. Supreme Court, which ruled that a business must have a physical presence in a state in order for that state to require it to collect sales tax.

Streamlined Sales Tax Project (SSTP) – 2000

This initiative was organized to simplify and modernize the sales and use tax collection and administration in the U.S. It was created in response to efforts by Congress to permanently prohibit the states from charging sales taxes for online commerce. As of this writing there are 24 member states, plus the District of Columbia, that have joined the SSTP.

A simple system was created, using the SSUTA (Streamlined Sales and Use Tax Agreement) by which ecommerce companies can voluntarily pay taxes to the states in which their customers live. The SSTP offers an incentive to sellers to use a Certified Service Provider to help assist with their compliance, as well as amnesty for certain periods prior to registration.

Resolutions S.Res.309 and H.Res.95

Introduced to the House by Representative Daniel Lungren on 2/16/11, and subsequently by Senator Wyden to the Senate on 11/2/11, these resolutions were offered in support of “the preservation of Internet entrepreneurs and small businesses.” They resolved, “That it is the sense of the Senate (and House of Representatives) that Congress should not enact any legislation that would grant State governments the authority to impose any new burdensome or unfair tax collecting requirements on small Internet businesses and entrepreneurs, which would ultimately hurt the economy of, and consumers in, the United States.” These resolutions made it clear to the states that Congress was not going to allow them to adversely affect small businesses trying to stay afloat by selling to out of state consumers.

The Main Street Fairness Bills – S.1452 and HR.2701

Introduced by Senator “Dick” Durbin on 7/29/11, and simultaneously in the House by William Delahurst, the Main Street bill is still in committee at this writing. It intended to override the Quill decision and allow the states to collect Internet sales taxes, requiring them to simplify their tax collection processes. The bill has wide support amongst brick-and-mortar businesses, as well as Amazon (though it is opposed by Ebay). This legislation is tied to the SSUTA and a state’s full-member status in the SSTP, and allows that any small business exemption would be defined by the governing board of the SSTP.

The Marketplace Fairness/Equity Bills – S.1832 and HR3179

Introduced in the House by Representative Steve Womack on 10/13/11, and subsequently “improved” in the Senate by Mike Enzi on 11/9/11, these bills are also currently in committee. This Marketplace Equity Act would grant authority to the states to require sellers (other than those who qualify for the “small seller exception” of gross revenues under $1 Million or an in-state revenue of less than $100k) to charge and remit sales taxes for transactions with customers in their states, regardless of the seller’s location. The Marketplace Fairness Act would define small sellers as having under $500,000 in gross online sales; this Act would also allow the states to join the SSTP or to set up a similar system of their own.

About the Author: Author Cherrell Tarantino writes for, an SST certified service provider of software for sales tax and experts on ecommerce sales tax compliance.