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Internet SalesTax Unconstitutional?

11 July 2011 No Comment

California Governor signed legislation to require out-of-state internet sales companies to collect and pay state sales taxes.  The bill expands the definition of a company having physical presence in the state and now includes companies with subsidiaries in California or business relationships that refer potential customers.

While the bill is a way to generate revenue and reduce state budget deficits, it is a job killer for large internet sales companies–as giants like Amazon and Overstock threaten end their physical presence in CA. Also many smaller businesses often operating out of one’s home use the internet as the main means of expanding their market share and customer base and will have a harder time paying compliance costs.

Internet sales tax collection bills have been supported by many traditional retailers, who argue they’re at a disadvantage having to shoulder the cost of sales tax collection and remittance. While the costs borne by the retailer are passed on to their customers in the form of higher prices, the online company can charge a lower price and offer tax-free shopping, in addition to the convenience of home ordering and delivery. Meanwhile, online retailers with a physical location in one or two states but millions of customers across the country, did not have to deal with such an expense.

Is a state internet sales tax bill really the way to go? A 1992 Supreme Court decision said retailers only had to collect the sales tax if they had an actual physical presence in the state. Arguably this bill allows states to regulate interstate commerce, something the Constitution strictly prohibits.

Danielle Phillips

Fashion Law Contributor

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