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Will Congress put to rest the aging dispute over remote sales taxation in 2017? The outlook is questionable despite lots of discussion and several pending bills, as well as a growing flurry of state activity to collect more taxes from online sales.
“The speaker would like to see us come together as much as possible,” Rep. Jason Chaffetz (R-Utah), who sponsors one of the pending congressional bills, told Bloomberg BNA. “But we do have competing bills and perspectives, so I don’t know exactly how that ultimately gets resolved. I just want it to be addressed sooner rather than later.”
As an “eternal optimist,” Chaffetz said a solution could surface this session. “As you talk to governors, state legislators and, increasingly, the online retailers, they need relief,” Chaffetz said. “And they need it soon. The system is not fair. It’s not balanced. And the lawsuits are flying everywhere across the country.”
Many practitioners have indicated that, standing alone, a remote sales tax bill may not have legs. However, folded into other measures, a resolution could be possible this year.
“I think the continued growth in online sales, combined with the changing political landscape after the November elections, could have some impact on congressional action,” Susan Haffield, a partner with PricewaterhouseCoopers LLP, told Bloomberg BNA. “Where I could see this moving in Congress, based on the strong retail lobby, is if they requested it to be addressed as part of the broader tax reform discussion. Trying to move it forward on its own as a separate issue has not been successful in the past.”
Haffield explained that during the early years of the Streamlined Sales and Use Tax movement among the states, many didn’t expect Congress to “expend a lot of political capital to raise money that they can’t spend themselves.”
“If this issue is addressed as part of a broader tax reform, where there is some negotiation, that just seems politically more feasible to me,” she said.
For years, federal lawmakers have volleyed back and forth on rival legislation designed to define states’ taxing authority over remote retailers. Without consensus on one national solution, and with online and catalog sales increasingly draining revenue from their coffers, states launched a crusade that could topple a long-standing federal restraint on taxing out-of-state sellers.
The target is Quill Corp. v. North Dakota, 504 U.S. 298 (1992), in which the U.S. Supreme Court ruled that states can only require sales and use tax collection from those businesses with an in-state physical presence. Nudged by Justice Anthony Kennedy, cash-strapped states have escalated efforts to “kill Quill” through the courts.
Meanwhile, conflicting perspectives over states’ taxing sovereignty have historically immobilized Congress, where bills offering a national solution have stalled for years.
But a development that might light a congressional spark is a judicial ruling that kills Quill. Alabama and South Dakota have summoned litigation over their economic nexus regulation and statute, respectively, which both states hope will advance to the high court.
Haffield explained that Congress may respond if the status quo changes. For example, “if a state level court decided that Quill should be overridden and then the U.S. Supreme Court denies cert., or the state level court upholds Quill and the U.S. Supreme Court overturns it, the so-called status quo would change,” she said.
However, Haffield noted that “so far, Congress just hasn’t seemed to see enough reason to try to change anything.”
Several lawmakers, including House Speaker Paul D. Ryan (R-Wis.), appear to appreciate that the opportunity to secure a federal solution on remote sales taxation may be closing.
“They all understand that this year might be the last chance they have to get it to move forward,” Max Behlke, manager of state-federal relations for the National Conference of State Legislatures, has told Bloomberg BNA.
Sources have told Bloomberg BNA that Ryan’s office has met with staffers for key sponsors of remote sales tax legislation, seeking a resolution in 2017. Key players include:
The Marketplace Fairness Act was the first stab at a national standard for state sales taxation, passing the 2013 Senate with a 69-27 vote. However, the bill faltered in the House—and has since struggled against divisions that don’t follow partisan lines.
Similar in structure, but with some differences, the RTPA has likewise met with resistance in its efforts to reach a House vote.
Many have singled out Goodlatte as the primary roadblock stalling the varying proposals. As chair of the House Judiciary Committee, which has jurisdiction over the bills, Goodlatte hasn’t moved measures out of committee for a floor vote.
Last year, an updated discussion draft of the OSSA was released, offering an alternative approach blending destination and origin sourcing.
States have largely resisted Goodlatte’s idea, and many officials and practitioners have dubbed the OSSA system “unworkable.” On the other hand, proponents of the plan have characterized it as a simple and fair framework that levels the playing field and restrains out-of-state regulation.
On background, a House Judiciary aide told Bloomberg BNA in an e-mail that the latest discussion draft has garnered support from more than 100 business and industry groups, including Americans for Tax Reform. According to the same aide, negotiations on the OSSA draft are ongoing and will continue in the new Congress.
On the other hand, the RTPA is considered by many as the starting point for a resolution, with bipartisan support among lawmakers in both chambers and 68 co-sponsors in the House.
“Congressman Womack was encouraged by leadership’s response to the Remote Transaction Parity Act, their rejuvenated efforts towards the end of last Congress to find an amiable solution, and their interest in closing the internet tax loophole once and for all,” Claire Burghoff, a Womack spokesperson, told Bloomberg BNA in an e-mail. “He will continue to work with Chairman Chaffetz to make this a reality before the courts decide to make this decision for us.”
But after a decades-old holding pattern and opposing philosophies on states’ taxation powers, the question remains: why could 2017 be the year of Quill‘s death?
The November 2016 elections didn’t uproot key congressional figures in the fight over remote sales taxation, though it certainly created new political terrain that may give root to a new federal framework.
“It’s a totally new world,” Arthur Rosen, a partner with McDermott Will & Emery LLP, said during the New York University Institute on State and Local Taxation in December. “Everything has changed. Everything you knew before about how politics works, what’s going to happen to Washington, is not necessarily valid anymore.”
But retailers have long pressed Congress for relief. And many still don’t anticipate the discussions among federal lawmakers will soon generate a unified solution that reaches the speaker.
“To date, despite multiple bill introductions by supportive members of both parties, the House Judiciary Committee has not marked up the legislation and we are far from a vote by the full House,” Joe Rinzel, senior vice president for government affairs for the Retail Industry Leaders Association, said in a statement.
“By failing to act, Congress has set into motion the activity we are seeing in the states and in the courts that we believe will level the playing field once and for all,” he added. “However it will do so without offering the protections that small businesses want and only Congress can provide.”
While awaiting action from Congress, practitioners and retailers continue to balance the pros and cons with the pending proposals.
Matthew Walsh, vice president of tax for Sovos Compliance, told Bloomberg BNA that each framework presents it own complexities, but software is available to facilitate compliance. However, the specific burdens on retailers and their internal systems vary with each proposal.
For example, critics have noted that the OSSA defines “origin state” as the state “in which the remote seller has physical presence and has employed the greatest average number of employees,” which may have no connection with a headquarter state. Walsh noted that Goodlatte’s plan would require retailers to determine their place of business on an annual basis—which can’t be determined by third-party software.
Walsh also explained that the OSSA may encourage forum shopping or political maneuvering.
“Because the tax base or the product taxability is based on what’s called the origin, or where that business is based, there is a concern that you will see businesses flock to states that don’t tax goods or have a very broad exemption system,” he said. “Or they will lobby the states to carve out exemptions for their particular industry.”
“The difference between the Goodlatte proposal and the other two is that they would have to go to every single state to get that exemption or that special tax treatment carved out,” he added.
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