Elections Unlikely to Resolve Clash Over Online Sales Taxes

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By Jennifer McLoughlin

Nov. 3 — What many have seen as a high-water mark in the “nexus war” over remote sales taxation may still not provide the stimulus needed to thrust Congress out of its two-decade silence on the issue.

Paralyzed by divisions over the appropriate course of action, Congress has let stand the U.S. Supreme Court's opinion in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which prohibits states from imposing sales tax collection obligations on sellers without an in-state physical presence.

During the past year, several states have openly snubbed the Quill rule by pushing through laws that recover revenue from remote retailers. Through it all, Congress hasn't stepped in with a solution.

As states are expected to continue this campaign, many are skeptical that the approaching presidential and congressional elections will lead to a long-overdue federal framework that stems the expanding patchwork of state regimes. And should the Supreme Court take up a kill- Quill case from the states, a decision discarding the physical presence standard may open the remote sales tax floodgates.

Lame Duck Legislation

After Nov. 8, many anticipate that Democrats will win back the Senate. On the other hand, the House may experience a party flip in some seats, but Republicans are expected to retain the majority.

Maureen Riehl, principal and counsel for MultiState Associates Inc., said the November results may dictate when and how Congress fashions a new federal framework for taxing remote sales.

“Whatever is done in lame duck has to meet with some kind of cooperation in both chambers, which is why November 8th is critically important,” Riehl said during an Oct. 11 panel hosted by the District of Columbia Bar, speaking on the prospects of federal bills impacting states. “Because they’re either going to be ready to play. Or they’re going to be ready to hurt. Or they’re going to be really, take their marbles and walk away.”

Hamilton Davison, president and executive director of the American Catalog Mailers Association (ACMA), likewise told Bloomberg BNA that during the lame-duck session, a change in Senate control “might make some people more willing and others less willing to move forward on certain things,” such as remote sales taxation. He noted that “things that are generally vetted and discussed prior to the lame duck have a much better shot than things that are brand new and unknown and untested.”

‘Little Oxygen.'

However, a post-election congressional solution to remote sales taxation may not top lawmakers' agenda—particularly as they contend with other items, including potential confirmation hearings for President Barack Obama's nominee to the Supreme Court, Judge Merrick Garland.

Combined with an end-of-the-year omnibus package, there will be little oxygen in the room for doing anything else, said Max Behlke, manager of state-federal relations for the National Conference of State Legislatures (NCSL). Absent an issue that is considered necessary and unlikely to move through the following Congress, lawmakers likely won't accomplish much else by year's end.

And for a controversial issue that doesn't split down party lines, e-commerce legislation is competing for attention.

“I just think the initiative or the impetus to get things moving is not high on the list right now,” Matthew Walsh, vice president of tax for Sovos Compliance, told Bloomberg BNA. “There are other things they want to deal with.”

Politics at Play

Several federal remote sales proposals are competing to redefine sales and use tax nexus—a constitutional principle requiring sufficient connection with states before they can assert taxing jurisdiction over individuals or businesses:

House Judiciary Chairman Robert W. Goodlatte (R-Va.) has also proposed a hybrid origin-based system that bases taxability of remote purchases on the seller’s location, but at the tax rate of the consumer’s location. The Online Sales Simplification Act (OSSA) hasn't been formally introduced—it has only been presented through discussion drafts.

Riehl noted that in September, Speaker Paul D. Ryan (R-Wis.) directed Goodlatte and Chaffetz to work out their differences. While there was no resolution before the October break, she said “there is some good-faith effort trying to be made yet before the end of the Congress” to arrive at a deal between the two lawmakers.

In the other chamber, Riehl said that leaders of the marketplace coalition and Senate leaders are discussing an alternative to the original MFA version—something that may resemble the Chaffetz bill.

Senate Majority Leader Mitch McConnell (R-Ky.) promised to hold a 2016 vote on the MFA in exchange for Sen. Richard J. Durbin (D-Ill.) lifting objections to a vote on the permanent Internet Tax Freedom Act. But it isn't clear if, when and how that may happen. If Republicans maintain control of the Senate, limited time coupled with competing priorities may deter that vote in the lame-duck session. If they lose, however, practitioners question whether McConnell would take action that isn't friendly to likely incoming Majority Leader Charles E. Schumer (D-N.Y.)—and it is anyone's guess whether that implicates remote sales taxation.

Significant or Inconsequential?

Ultimately, the outcome of the congressional elections may not change either chamber's long-term calculus toward pending e-commerce proposals.

Without a swing in the balance of power, key House committee leaders likely will remain. This includes Goodlatte, who many have identified as the prime hurdle to a House vote for remote sales tax bills contrary to the OSSA.

“This sales tax nexus question is playing out in a larger context over what are appropriate rules for states governing outside their borders,” Stephen P. Kranz, a Washington-based partner with McDermott Will & Emery LLP, said during the Oct. 11 D.C. Bar panel. “When should a state have the ability to reach outside its border and impose a regulatory burden on somebody that’s not inside its border or a tax burden?”

Kranz explained that Goodlatte's world view is grounded in the principle of “no regulation without representation.” Originally frustrated with California's chicken cage law, which sets cage dimensions for any farmer selling eggs into the state, Goodlatte's angst against cross-border regulation has bled into the tax discussion—and there is no sign of him easing opposition to state regulation beyond geographic lines.

Some practitioners have reported that OSSA, updated in the latest discussion draft released Aug. 25, is gaining little traction among lawmakers. And with significant support for the RTPA, which now has 68 co-sponsors, chances of House consensus on one solution remain slim.

Retaining Status Quo

Likewise, any shifts in leadership or seats likely won't move the Senate's compass on e-commerce legislation.

Since passing in the 2013 Senate, and then subsequently stalling in the House, the MFA hasn't come to a vote. And should the McConnell-promised vote not happen this year, many expect the status quo—including ongoing opposition from three senators in states without sales tax to any legislation imposing sales tax compliance burdens on small online businesses.

“Even if the Senate does change hands, because each senator has a nuclear backpack strapped to their back with which they can block anything, it sounds very likely that that hole will shut down anything in the Senate,” Davison said. “So it shouldn't affect things too much.”

Despite what materializes in either the House or Senate, an end to the battle over remote sales taxation seems unlikely within a gridlocked Congress.

“Getting the Senate and the House on the same page is really a difficult thing to do,” Rob Clarke, a Tampa, Fla.-based principal with Grant Thornton LLP, said during an Oct. 6 webinar. “And I don't see that happening anytime soon, to be quite frank.”

Growing Gridlock on Hill

Moreover, the gridlock that has gripped Congress may only deepen in 2017.

Behlke explained that should Nov. 8 leave the GOP with fewer House seats, the Freedom Caucus may emerge with a more powerful presence. This could exacerbate divisions within the party—particularly if Ryan is forced into brokering deals with Democrats.

Ryan's role as House Speaker may also be in jeopardy, potentially throwing the chamber into chaos without clear leadership. No one has submitted a successor, but the threat of a Republican rebellion may coerce Ryan into concessions for conservative votes.

“I think the gridlock, especially in the House, is going to be worse than what it is now,” Behlke said. And with a federal legislative stalemate, state legislatures will continue to push their e-commerce agendas.

Potential Post-‘Quill' Chaos

Some on the Hill, particularly in Ryan's office, 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,” Behlke said. Should the Supreme Court abrogate Quill, states may resist future congressional proposals, viewing them as infringing on their fiscal sovereignty—particularly after no congressional fix for more than 20 years.

Likewise, expecting the end of Quill, Utah Sen. Curtis Bramble (R) has cautioned that Congress' stalling tactics may deter a uniform federal resolution.

“If Quill falls before there is a national solution, it will be very, very difficult to get a national solution,” Bramble said.

Moreover, Behlke said the prospect of the high court's intervention may encourage Congress to turn a blind eye while awaiting a judicial rule. The issue could come before the Supreme Court soon, as both Alabama and South Dakota are hosting litigation over 2016 regimes that directly challenge the Quill holding. Certiorari petitions from Colorado and Florida also confront Quill.

According to Davison and Steve DelBianco, executive director of NetChoice, “the Supreme Court is the beginning” should it abandon the 25-year-old decision.

“Thinking that the Supreme Court will be the end of the story for states is a mistake in notion,” DelBianco told Bloomberg BNA. NetChoice has joined the ACMA in litigation contesting South Dakota's economic nexus regime that requires sales tax collection from select remote retailers. “If Quill were to fall, it's the beginning of the story. It's a story that starts with states having no restraints at all in asserting their tax and audit powers over any business anywhere in the country. And that would generate enough chaos that businesses would demand that Congress step into its constitutional role to protect interstate commerce.”

Post-‘Quill' Solution?

Could a post- Quill world allow for a uniform federal solution with support from the states?

“That's a function of how Congress responds,” DelBianco said.

“You turn to MFA and RTPA, and they're completely useless in the wake of Quill falling,” he said, explaining that they are “enabling legislation, not limiting legislation,” lacking provisions preempting states' independent measures. On the other hand, the OSSA “locks in physical presence, which limits the reach of state tax auditors, and enables states to get the tax revenue they seek through a simple process of in-state administration on remote sales.”

Following Goodlatte's latest discussion draft, more than 100 business and organizations signed a letter backing the OSSA, including Overstock.com Inc. and Blue Nile Inc. Although missing from the letter, Amazon.com Inc. has voiced support for Goodlatte's proposal. And platforms supporting smaller businesses, such as Etsy Inc., have expressed a preference for an origin-based fix.

But several states have panned the origin-based proposal as unworkable, an opinion shared by the Multistate Tax Commission in a recent analysis. Numerous states, vendors and trade associations have long endorsed the MFA, including Amazon and Wal-Mart Stores Inc.

Executive Influence Over E-Commerce

Not far from the Hill, the new White House resident may also play a marginal role in the remote commerce clash.

Assuming Garland doesn't rise to the bench, the incoming president will propose a nominee to fill the Supreme Court vacancy.

“Depending upon whether Clinton or Trump gets elected, the nominee may or may not be confirmed,” Julian A. Fortuna, a tax partner with Taylor English Duma LLP, told Bloomberg BNA. “And the nominee may have some impact on whether the Court is going to be willing to overrule Quill.”

Many practitioners have pointed to language in Quill that may manifest the high court's inclination to deny review of any case contesting it:

“This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”

“The Court has been very hands off with respect to legislating from the bench, in the sales tax arena in particular, from a nexus perspective,” Clarke said. “And I think, honestly, that’s going to continue on a go-forward basis for a while. They really do want Congress to act and come up with some type of standard under the commerce clause, so that they can essentially pass legislation, which is their charge under our constitution.”

To contact the reporter on this story: Jennifer McLoughlin in Washington at jmcloughlin@bna.com

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

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