Collecting Remote Sales Tax Top Federal Issue to States

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By Tripp Baltz

The National Conference of State Legislatures ranked remote sales tax collection as its number one state-federal priority for 2017.

Meeting for a priority-setting exercise Jan. 15, the NCSL’s Executive Committee said having the authority to collect sales and use taxes on e-commerce and other remote transactions was its top-ranked issue, two notches higher than the state response to anticipated changes in the federal tax code.

State budget certainty, a possible balanced budget amendment and programmatic changes to Medicaid were among the other fiscal priorities that made the list. Transportation and infrastructure funding topped the list of major state issues.

Use as Leverage

Many states’ legislative leaders don’t feel Congress will enact anything on state sales and use tax collection on remote sales—such as the Marketplace Fairness Act—until after it takes up major changes to the federal tax code proposed by the Republican majority and by the incoming Trump administration. “I don’t think they’re going to do anything before tax reform, and there’s concern they might use it as leverage,” said Max Behlke, budget and tax policy director. “They might give states the Marketplace Fairness Act in exchange for state’s taking the hit they might take from tax reform.”

States will move forward with tax collection without a congressional solution if the U.S. Supreme Court overturns the foundational physical presence standard it upheld in the 1992 decision of Quill Corp. v. North Dakota, Behlke said. In that ruling. the court said a state can require a seller to collect and remit sales and use taxes only if the vendor has a physical presence in the state.

States are moving forward with “economic nexus” laws, designed to allow them to compel vendors to collect taxes on remote sales if they meet a certain sales threshold, such as $100,000 in gross receipts or more than 200 sales transactions. Others have passed “affiliate” or “click-through” nexus laws, or reporting and notice requirements, to spur out-of-state retailers to collect.

Ironic Situation

If court cases on these state laws result in the Supreme Court overturning Quill, “we will not ask for a congressional solution,” Behlke said. “The irony is that some of the same people who have opposed a national framework, which is what we have pushed for, will want one if Quill is overturned,” he said. “And I will be out there saying we don’t want it.”

“If states can do whatever they want as far as tax collection, then why would they want to comply with a federal regime if they already have the ability to do that?” he said. Behlke said he predicts as many as 20 states will consider bills in 2017 challenging the Quill standard or enacting a reporting and notice requirement fashioned after a 2010 law upheld last year by the U.S. Court of Appeals for the Tenth Circuit.

“Overturning Quill is the best possible solution for the states,” he said. “It might not be the best for everybody in terms of creating a patchwork quilt, but if the Supreme Court overturns Quill, we will not be asking for Congress to do anything.”

Talks Cease

Utah State Sen. Curtis Bramble (R), immediate past president of the NCSL, told Bloomberg BNA the organization and other state advocacy groups stopped having talks with members of Congress about a federal relationship after a conversation with Rep. Bob Goodlatte (R-Va.), chair of the House Judiciary Committee, didn’t bear fruit.

“We decided not to continue a quest for a federal solution,” Bramble said. “Amazon has now entered into an agreement to collect taxes in 35 states. The inertia has shifted, and states will prevail in overturning Quill. The states will do this on their own.”

If that happens, it will flummox those in Congress who support a national framework, he said. “Fifty states doing their own thing will create the very thing they say they oppose. Congress will be doing what Congress does best, which is nothing.”

Reporting Laws

Bramble said while he supports legislation that allows states to compel out-of-state retailers to collect taxes based on economic or affiliate nexus, he is not a fan of laws to require vendors to report consumer purchases to states. “You’re saying that instead of paying tax at the time of purchase, you’d rather have the seller report what you bought and how much you paid to the state?” he said. “That invokes images of big brother to me.”

Steve DelBianco, executive director of NetChoice in Washington, D.C., told Bloomberg BNA states considering reporting laws like Colorado’s are wrong to view it as an effective way to goad out-of-state vendors to collect state sales and use taxes on electronic and other remote sales. “They could face a firestorm of consumers when the privacy concerns come to light,” he said. “What will residents of Colorado say when the vendor tells them the state revenue department is collecting data on their personal purchases?”

Vendors will go ahead and report the information—which includes what items consumers bought and what they paid for it—to the department rather than remitting taxes, he said. “They’ll say, ‘We’re not going to be bullied into collecting and remitting in states where we have no nexus.’ Instead they’ll do the reporting and notify consumers of their obligation to pay the tax. But they’ll also tell consumers the report is going to indicate what they bought.”

‘Tattle-Tale’ Bills

DelBianco urged states not to pass “tattle-tale” legislation like Colorado’s. In the best case, states could choose to audit individual consumers “for back taxes,” he said. In the worst case, “since states are typically sloppy at guarding data, it could fall into the hands of someone who could leak it to a political opponent of a purchaser.”

A reporting and notice law was approved by Louisiana, and a bill will be up for consideration during the upcoming session of the Utah Legislature. A pending law in Vermont requires vendors to give notice to consumers they have an obligation to pay taxes on their remote purchases, but the measure doesn’t require reports to the state, so it is not “tattle-tale” legislation like Colorado’s, DelBianco said.

Because of litigation, Colorado’s 2010 law has never taken effect, but after the Tenth Circuit ruling it is constrained only by an injunction in a state First Amendment case. The Colorado Department of Revenue is deliberating on next steps.

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

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