Testing the Models of Tax Compliance: The Use-tax Experiment

Researchers in a number of fields have explored the question of why people voluntarily comply with the tax laws. The resulting scholarship suggests that a number of factors influence that decision, but the precise role of, and interaction between, those factors continue to be subjects of debate. More research is thus needed, including field research to put the current theories to test in real-life settings. This Article proposes that state use taxes—known primarily as the taxes that are due when taxpayers purchase items online without paying sales taxes—provide a remarkable opportunity for that research. Compliance with those taxes is virtually nonexistent, and most discussions of that issue simply assume that obtaining meaningful levels of voluntary compliance will be impossible. Those assumptions are largely based on rudimentary applications of a basic deterrence model, which relies heavily on audit risk and penalties as motivators of compliance. The modern models of tax compliance, however, offer many different theories with which states could experiment to promote the voluntary payment of those taxes. That experimentation would not only help states to increase their tax collections, but would also help states and researchers to obtain a deeper understanding of the very models being applied. The lessons learned from those efforts could thus help to inform researchers, the federal government, and governments worldwide regarding how to best encourage voluntary compliance with tax laws more generally. This Article begins the process of obtaining those reciprocal benefits by summarizing the current models of tax compliance and by offering concrete examples of how states could use those models within the context of their use-tax systems. The Article concludes by exploring the features of state use taxes that make them especially well suited for these efforts

A Unifying Approach To Nexus Under The Dormant Commerce Clause

The Supreme Court has long debated the existence and scope of its power to restrict state regulation under the so-called negative or dormant Commerce Clause. The Court took a broad view of that power in the late 1800s, but it has refined and restricted its role over time. One area where the Court has continued to wield considerable power, however, has been in the context of state taxes. Specifically, the Court has continued to restrict states\u27 power to compel out-of-state vendors to collect their sales and use taxes based on a physical-presence nexus rule. That rule dates back to the Court\u27s early oversight of how states taxed itinerant drummers and vendors who sold their goods via catalogue, but it has a very different meaning in today\u27s world. States now lose an estimated $20 billion of tax revenue annually due to the combination of the physical-presence rule and the amount of commerce that is done online

The Illusory Promise of Economic Nexus

The economic nexus standard has gained significant support during the last decade as the proper standard for determining the scope of states’ taxing powers under the Dormant Commerce Clause. Unfortunately, however, despite the widespread acceptance of that standard in the abstract, there is no uniform understanding of what economic nexus actually means. State courts that have adopted that standard have generally failed to explain its parameters, and those few courts that have actually addressed the scope of economic nexus have adopted artificially high standards that severely restrict its reach. Actions by state legislatures and revenue authorities have been much the same. Uncertainty reigns, yet those disparate approaches to the same constitutional standard have yet to receive scholarly attention. This Article seeks to fill that void by analyzing state actions in this area and by evaluating how states’ different formulations for economic nexus will likely develop over time. Such an analysis shows that states’ economic nexus formulations have little theoretical or jurisprudential grounding and will necessarily change and deteriorate over time. As a result, states’ actions in this area will be non-uniform and will maintain the significant uncertainty that currently exists. Federal attention to economic nexus is thus warranted to prevent state actions from undermining the goals of the Dormant Commerce Clause. This Article analyzes several potential federal responses and concludes that Congress should intervene and adopt a federal factor nexus standard based on the Multistate Tax Commission’s model formulation

Wayfair: Sales Tax Formalism and Income Tax Nexus

This is the second of a series of essays wherein we analyze the U.S. Supreme Court\u27s decision in South Dakota v. Wayfair. In this essay, we address issues related to sales tax formalism and income tax nexus

Wayfair: Marketplaces and Foreign Vendors

This is the third of a series of essays wherein we analyze the U.S. Supreme Court\u27s decision in South Dakota v. Wayfair. In this essay, we address issues related to state taxation of internet marketplaces and of foreign vendors

Consumer-Based Use Tax Enforcement and Taxpayer Compliance

This essay explains how current state government approaches to use-tax enforcement undermine tax morale and taxpayer compliance. This essay further argues that these threats to tax morale and taxpayer compliance will become even more severe as many states are moving toward adopting notice and reporting statutes for their sales and use taxes

Wayfair: Substantial Nexus and Undue Burden

This is the first of a series of essays wherein we analyze the U.S. Supreme Court’s decision in South Dakota v. Wayfair. In this essay, we tackle some of the more immediate interpretive questions raised by the Wayfair opinion, such as how a state should approach substantial nexus. As part of our analysis, we offer advice to state governments. Specifically, we recommend that states take note of the features of South Dakota’s law that appealed to the Court and replicate or improve on these to the extent possible. We advise states to consider simplifying their sales tax systems (and potentially joining the Streamlined Sales and Use Tax Agreement if they have not already done so), offering full and adequate reimbursement for compliance costs (especially for smaller vendors), and offering free compliance software and immunity for vendors who properly rely on such software