Don’t be surprised if local governments start getting a piece of the e-commerce pie. According to the U.S. Small Business Administration, if you conduct business online but your business has a physical presence in a state, you must collect applicable state and local taxes. However, a 1992 Supreme Court ruling held that states cannot require online retailers to collect sales tax unless they have a physical presence in the state.
According to the Seventh Circuit of the United States, the Court of Appeals decided in 2010 that a second tax on a resale of a ticket to an entertainment event in Chicago does not fall under the Tax Freedom Act § 110 et seq., 47 U.S.C.A. §151 (hereinafter Internet Tax Freedom Act). The Internet Tax Freedom Act prohibits multiple or discriminatory taxes on electronic commerce on tangible personal property. Because taxes on Stubhub! are done online, Stubhub!’s defense consisted of being under the umbrella of multiple taxes. For instance, if a user sells a ticket on the Stubhub! website, Stubhub! would not charge the new user an additional tax because the seller paid the tax on the ticket when she initially bought it. Chief Judge Easterbrook wrote the opinion on this case:
“the statute does not create ‘tax freedom’ for transactions on the Internet…”
City of Chicago, Ill. V. StubHub!, Inc., 624 F.3d 363 (7th Cir. 2010).
Chief Judge Easterbrook explained the term “multiple tax” involves two states taxing the same thing without a tax credit. Thus, because there was only one tax on tickets for events in Chicago, the tax is valid on the ticket (tangible property) even if they are called “multiple taxes.” In an easier sense, the reselling of tickets is not protected under the Internet Tax Freedom act because the Chicago tax is not discriminatory against Chicago citizens (meaning all tickets are being taxed, not just the tickets outside of Chicago) and other states such as Wisconsin, Indiana, etc. would be taxed the same amount.
The Streamlined Sales Tax Governing Board works to help states modernize sales and tax collection for online practices. The Streamline Sales Tax Project (SSTP) works to uniform the different state tax codes in order to propose to Congress to create a law that allows states to tax online sales. The SSTP stresses that companies, whether they be “brick-and-mortar” stores or online remote sellers, should be on the level playing field and be taxed equally. There are currently 44 states that utilize the Streamlined Sales and Use Tax Agreement by simplifying their tax codes and use tax collection.
As the decision to tax a corporate entity conducting business solely online comes from a United States Court of Appeals, defining whether a state or local government can collect a tax is a hot topic on the table. Determining which sales tax to charge can be a challenge. However, lawmakers are determined to get the sales tax dollars.