Congress Unlikely to Limit State Online Tax Powers: Tax Director

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Ryan Prete

States must keep an eye on Congress as it considers legislation that could affect how states tax online sellers like Amazon.com, Inc., even if federal intervention is unlikely.

Joe Huddleston, an executive director at Ernst & Young LLP’s National Indirect Tax group and former Multistate Tax Commission executive director, told Bloomberg Tax that states must monitor efforts on Capitol Hill even though “if history tells us anything, I think there’s a small chance this ever gets acted on.”

Federal legislators have renewed focus on state taxation of online sales after the June 21 U.S. Supreme Court ruling in South Dakota v. Wayfair, which has many states looking to expand their tax authority over online sellers like Amazon and Etsy, Inc.

The House Judiciary Committee held a hearing July 24 on online sales tax, but there was no clear road map for what’s ahead in an area where states have been increasingly active since the Wayfair ruling.

“I don’t think this issue will be hit upon in this Congress because of other matters at hand,” Huddleston said during the MTC’s 51st annual meeting in Boston on July 26. “Congress has notoriously stayed away from sales tax-related issues.”

The Wayfair decision tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold—effectively removing a major hurdle to when states can constitutionally tax online sales. The majority in the 5-4 ruling suggested strongly that South Dakota’s law would pass constitutional muster; the statute imposes a tax collection threshold at 200 transactions or $100,000 in in-state sales.

The court stopped short of formally declaring South Dakota’s law valid in the absence of Quill, and the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. It’s expected to do so in mid-August. In the wake of the groundbreaking decision, dozens of states that haven’t already done so are mulling whether to copy South Dakota’s law.

Gestating Congressional Bills

Four bills are pending in Congress, though none has moved to a vote since their introduction, which has been true for similar legislation involving states’ authority over online sales taxation for years.

During the July 26 MTC Executive Committee meeting, Thomas Shimkin, legislative counsel and director at the MTC, was critical of language in the newest federal bill, which is the only one introduced after Wayfair. He said that the Stop Taxing Our Potential (STOP) Act (S. 3180)—a bill seeking to overrule Wayfair—has a “very narrow” interpretation of the physical presence rule that calls for no remote sales tax collection by states.

The other bills are:

Notice, Reporting Still Relevant?

Also during the MTC Executive Committee meeting, members voted to send a model sales and use tax notice and reporting statute back to the group’s Uniformity Committee for potential changes in light of the Wayfair ruling.

The model, which has been in development for some time, is patterned after a 2010 Colorado law that imposes reporting and notice obligations on out-of-state vendors that don’t collect sales and use taxes on remote sales. Reporting regimes have popped up all over the U.S., popular as a more-indirect way to compel online sales tax collection.

The MTC was originally set to adopt the model for states to consider as they look to expand their tax authority over remote sales. But after the Wayfair ruling, many state and local tax practitioners feel that the reporting statute model could become obsolete as states instead look to a South Dakota-copycat model, which compels tax collection based on the threshold of sales made within a state.

Partnership Audits

The Executive Committee also agreed it would discuss the draft of a model uniform law for reporting adjustments to federal taxable income and federal partnership audit adjustments at its November meeting in Orlando, Fla.

The draft model statute was created as a tool for states to use when addressing the new federal centralized audit regime created by the Bipartisan Budget Act of 2015.

Helen Hecht, MTC general counsel, and Tracee Abel, partnership work group chair, have led efforts behind the model for almost two years. They have worked alongside representatives of taxpayer-representing groups like the Council On State Taxation, Tax Executives Institute, a task force of the American Bar Association tax section’s State and Local Tax Committee, the American Institute of CPAs, the Institute for Professionals in Taxation, and the Master Limited Partnership Association, among others.

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