Taxation of Internet Sales - Where in the Cyberspace is Nexus?

Abstract

The advent of the Internet in the 1980’s revolutionized the world of computers, information technology and communication. The Internet, with its international broadcasting capabilities, is an instrument for broadcasting information and a medium for partnership and interaction between persons and their computers without regard to geographic setting. Its viral capability has reinvented the way the world works, communicates, and deciphers information. Because of the Internet’s instantaneous abilities, news spreads like wildfire around the world, keeping secrets is virtually impossible, and persons and companies now have direct and immediate access to their target audience. With the dawn of the Internet age, the corporate world also found a new and efficient way of doing business – via e-commerce. In the U.S. alone, e-commerce retail sales grew from $995 billion in 1999 to $2,385 billion by 2006. A 2009 study estimated that e-commerce transactions are anticipated to rise from $3 trillion in 2010 to $4 trillion in 2012. This study further predicted that while $45.9 billion dollars in sales taxes will be due by the states cumulatively in 2012, only $34.5 billion of that amount will actually be collected, resulting in an anticipated overall U.S. sales tax loss of $11.4 billion dollars in 2012 alone. Amidst these staggering numbers, can states do anything more to collect sales tax emanating from e-commerce sales? The answer to this question lies at the heart of the query: Where in the cyberspace is nexus? While this article does not attempt to define a solution to this question, its purpose is to present an overview of statutory rules currently in place pertaining to sales and use tax, with particular attention paid to the area of e-commerce sales; examine the Constitutional mandates in place regarding “nexus” and “physical presence”, with heavy emphasis placed on federal and state judicial case law; scrutinize the current situation between deficit-stricken state taxing jurisdictions and cyber-retailers seeking shelter under the umbrella of the Due process and Commerce Clauses; and provide observations for the need to create uniformity among the states in dealing with e-commerce transactions.