v16_2005g - 122 Jeptha Nafziger 6 TAXING...

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122 Jeptha Nafziger 7 6 Jeptha Nafziger is a Master of Public Policy candidate at the Gerald R. Ford School of Public Policy, University of Michigan ([email protected]). T AXING B USINESS - TO -C ONSUMER I NTERSTATE R EMOTE R ETAIL S ALES : E CONOMICS V . J URISPRUDENCE IN THE B ATTLE O VER T AX J URISDICTION Jeptha Nafziger Retail sales and use taxes constitute a major component of state and local tax bases, providing critical funds for many public programs. The continued and increasing signiFcance of non- taxed remote retail sales—interstate sales of goods by Frms without sufFcient presence in the destination jurisdiction—has put the long-term solvency of these tax bases and the public programs they fund in jeopardy. To a considerable extent, this problem is attributable to the oft-criticized “nexus” standard, a legal concept that limits a jurisdiction’s ability to tax remote transactions based on constitutional and stare decisis grounds. This paper offers a summary of the jurisprudence that has yielded the current nexus interpretation, an economic critique of its underlying principles, and several recommendations that could serve as policy alternatives to the status quo. I NTRODUCTION Remote interstate business-to-consumer (B2C hereafter) sales are an in- creasingly important component of the U.S. retail market (see Table 1 in appendix). Catalog, mail order, and telephone sales account for the major-
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123 Taxing Business-to-Consumer Interstate Remote Retail Sales: Economics v. Jurisprudence in the Battle Over Tax Jurisdiction ity of such transactions, but “e-commerce” transactions are a critical and growing retail medium profoundly impacting the retail landscape. Recent estimates put total B2C remote sales in 2002 at about $150 billion (Direct Marketing Association and Lenard 2004), which is roughly 5 percent of total retail sales (Table 1). Given the magnitude of B2C remote sales, how and where such sales are taxed impacts many economic outcomes, perhaps most critically the Fscal stability of state and local governments. Why do remote interstate transactions cause problems for state and local taxing authorities? At its most basic, the current retail sales tax system is primarily dependent on situs ; where a transaction takes place determines who is taxed, how they are taxed, and where the tax revenues go. The very nature of remote transactions compromises this feature by permitting economic interactions without geographic location. Constitutional provi- sions and clarifying case law rely on geographically based “nexus” rules to determine taxability, where nexus is deFned as the sufFcient presence of an entity within a state, so as to apportion the entity’s taxable income to that state (although the Quill decision, to be discussed later, reversed this to some extent) (Black 1990). While it may be possible to determine the location of a good’s origin
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v16_2005g - 122 Jeptha Nafziger 6 TAXING...

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