| abstract
| - State governments rely on sales and use taxes for approximately half (48.2%) of their total tax revenue — or approximately $715.2 billion in FY2004. Local governments derived 11.4% of their tax revenue or $44.6 billion from local sales and use taxes in FY2003. Both state and local sales taxes are collected by vendors at the time of transaction and are levied at a percentage of a product’s retail price. A state may tax a transaction if there is some connection (nexus) of the transaction to the state. Thus if the seller or the buyer is located in the state, the transaction may be subject to the sales tax. The important question in the out-of-state seller context is not the state’s power to tax the transaction, but rather whether the state can require the out-of-state seller to collect the tax from the purchaser. While in such cases the buyer is required to remit a use tax to his or her state government, typically through the state income tax, in reality, consumer compliance with this requirement is quite low. Thus, contrary to what some commentators suggest, Internet purchases are essentially "tax-free" only in the sense that consumers are evading the use tax due on their online transactions. Many observers suggest that the expansion of the Internet as a means of transacting business across state lines, both from business to consumer (B2C) and from business to business (B2B), threatens to diminish the ability of state and local governments to collect sales and use taxes. The variation among the state and local governments in the administration of the sales tax is at the center of the Internet tax debate. The U.S. Supreme Court has ruled that the collection of sales taxes by remote vendors would be too burdensome; there are thousands of taxing jurisdictions, each with its own rates and base. The Due Process and Commerce clauses of the U.S. Constitution limit a state from imposing tax liability or collection responsibilities on a business concern unless there is a substantial nexus or in-state contact established with the state. There is currently no statutory authority and scant case law on the subject of nexus and the Internet, but the U.S. Supreme Court has given considerable guidance in the analogous area of taxation of mail order sales. The two major Supreme Court decisions in this area are National Bellas Hess, Inc. v. Illinois Department of Revenue, and Quill Corp. v. North Dakota.
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