While by no means a sure thing, recycling fees could embolden states to collect taxes on direct marketing sales, even if the marketers don’t have a physical presence in the state.
Current law exempts businesses from collecting taxes in states where they don’t have such presences. But on July 1, California is set to start collecting fees of between $6 and $10 for electronic products that contain toxic levels of substances such as lead or mercury. The fees would go toward defraying costs associated with disposal of hazardous material. These advance recycling fees would be tacked on to the price of items such as fluorescent lights and computer monitors.
Recycling fees are one thing. The concern is that acceptance of such fees could establish a “nexus,” or connection, between a marketer that does not have a presence in the state and the state’s government. In its 1992 decision for Quill Corp. vs. North Dakota, the U.S. Supreme Court ruled businesses must have a physical presence in a state before the state can require marketers to collect sales taxes, a notion reaffirmed in the 1998 Internet Tax Freedom Act.
As it happens, passage of a recycling fee won’t likely provide a clear precedent for taxation, according to Martin I. Eisenstein, an attorney with Lewiston, ME law firm Brann & Isaacson.
“In the area of regulation, where a state exercises its police power to review and regulate the control of items that affect the environment, the [federal] constitutional standard may be different,” Eisenstein said.
He continued, “Under the due process clause the state has a wider latitude to legislate than it would under the commerce clause. I don’t see that as a steppingstone for obliterating the nexus requirement. There is a lot of very good, powerful case law that says that a state can’t do under the guise of regulation what it can’t do under state tax laws.”
But, he cautioned, direct marketers and their legal counsels should review the requirements of each state’s statutes on their own.
The tax ramifications are far from hammered out, but if the recycling fees are ever ruled to serve as precedent, the results could be more onerous than some marketers choose to bear. “If we feel it will create nexus we will have to stop selling in California,” said Ron Solomon, in-house counsel for electronics marketer Crutchfield Corp., Charlottesville, VA.
“I’m disappointed at trade organizations for retailers,” Solomon added. “They should have been aware of this a long time ago.” Implementation of the California legislation, he noted, had been delayed, and lobbyists for the manufacturers “got the burden [of collection] shifted to retailers.”
Often, as goes California, so goes the rest of the nation. Minnesota Sen. Linda Higgins (D) and Rep. Ray Cox (R) have introduced similar legislation in their state, which would require either manufacturers or retailers to collect recycling fees.
It’s not hard to imagine this trend spreading. Currently Massachusetts and Maine, along with Minnesota, ban cathode-ray tubes, which are found in computer monitors and televisions, from its landfills. Michigan has passed similar legislation, which is due to be implemented by 2006, and 28 other states are considering such laws.
