Is Federal Digital Sales Tax Legislation on Its Last Legs?

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

Don’t expect anything from Congress—for now.

That’s what state and local tax practitioners are saying in terms of federal online sales tax legislation after the U.S. Supreme Court removed a major obstacle to when states could tax online sales.

“Congress has had decades to act in this space, and hasn’t, so I don’t expect anything different for the remainder of the 115th Congress,” Brian Kirkell, a Washington-based principal at RSM US LLP, told Bloomberg Tax.

Still, four pending tax bills are still active—three that were introduced before the high court’s June 21 ruling in South Dakota v. Wayfair, Inc., which tossed out Quill Corp. v. North Dakota, the court’s 1992 physical presence threshold for when states could tax remote sales. And the lawmakers behind them aren’t letting their feet off the gas.

“Montanans don’t pay sales taxes and we shouldn’t be in the business of collecting sales taxes. That’s why the Supreme Court’s recent decision has created a crisis for Montana-based businesses that rely on the internet to get by,” Sen. Jon Tester (D-Mont.) told Bloomberg Tax in an email.

Tester is the sponsor of the Stop Taxing Our Potential (STOP) Act (S. 3180), a bill that would undo Wayfair and prevent a state from imposing tax collection or information reporting obligations on sellers with no physical presence in a state. The STOP bill hasn’t moved or been considered in the Senate after its post-Wayfair introduction.

“The Stop Taxing Our Potential (STOP) Act will reverse this decision and defend small businesses against the crushing weight of paperwork and red tape required to collect and remit sales taxes on behalf of thousands of different tax jurisdictions,” Tester said. “Congress should have addressed this issue long before today, but I hope the Court’s decision creates a new sense of urgency that forces Congress to finally do its job and pass this law.”

Sen. Mike Enzi (R-Wyo.), who for several sessions of Congress has introduced a version of the Marketplace Fairness Act of 2017 (S. 976) (MFA)—which would abrogate the Quill physical presence rule and allow states to require out-of-state sellers and online vendors to collect tax on in-state sales—is also still pushing for federal action. The MFA overwhelmingly passed the Senate in 2013, but hasn’t seen action since.

“Since the ruling, Senator Enzi has been gathering additional feedback from states, businesses, and others impacted” by Wayfair, Max D’Onofrio, Enzi’s press secretary, told Bloomberg Tax.

The other two pending bills are the Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA), which would abrogate the physical presence standard and allow states to require out-of-state sellers and online vendors to collect tax on in-state sales, and the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), which would, in part, seek to codify Quill’s physical presence standard.

The NRRA was the focus of a July 2017 House Judiciary Subcommittee hearing, and the RTPA has received no congressional action at all.

‘Good As Dead’

Kirkell isn’t convinced that any of these bills are still active.

“The MFA and RTPA, regardless of the nuances, are as good as dead, because the whole point of these was to allow the taxation of remote sellers in a post-Quill world, which the high court has now allowed,” Kirkell said. “I think the STOP and NRRA bills will continually get introduced year after year, but we will see these fade away, too, as compliance software becomes more readily available and we adjust to post-Wayfair world.”

Alongside Enzi, co-sponsors of the MFA Sens. Heidi Heitkamp (D-N.D.), Dick Durbin (D-Ill.), and Lamar Alexander (R-Tenn.) urged Congress in a July statement not to pass legislation concerning the Wayfair ruling until feedback could be collected from states and businesses.

“We are mindful that any new sales and use tax collection requirements may present new and unanticipated challenges, especially for small businesses,” the senators said. “However, Congress should not take any legislative action until we better understand the issues facing those impacted by this ruling.”

The House Judiciary Committee heard a litany of online seller concerns during a July 24 hearing on the post-Wayfair world of state sales taxation, but it didn’t result in a clear road map for what’s ahead.

House Judiciary Committee Chairman Bob Goodlatte (R-Va.) is often considered the main roadblock behind the lack of consideration for the MFA and RTPA, but he will retire at the close of 115th Congress in January.

Future Legislation

Kirkell said he expects a new wave of legislation to be introduced once the 116th Congress comes to session in January.

“I think new legislation will be focused on forcing all states to codify the recommendations of Justice Anthony Kennedy in the Wayfair decision,” Kirkell said. “But, as soon as there is federal legislation, the states will have more limited power. This is something states obviously want to avoid.”

In the Wayfair opinion, Justice Kennedy suggested a state’s law could pass constitutional muster if:

  • the state installed a threshold that recognizes a “substantial nexus,”
  • the state didn’t push for retroactive taxes, and
  • the state is a member of the Streamlined Sales and Use Tax Agreement (SSUTA)—a program under which sellers collect tax voluntarily and remit it to the 24 state participants, which cover the filing costs and other fees.
Amazon, eBay, Etsy Staying Quiet

E-retail giants like Amazon.com Inc, Etsy Inc, and eBay Inc. haven’t been shy with their opinions about the Wayfair ruling.

Jill Kerr, public relations manager at Amazon told Bloomberg Tax Aug. 14 the company had no further comment after Dave Fildes, director of investor relations at Amazon said the company continued to believe the sales tax issue needed to be resolved at the federal level and that the company was working with states, retailers, and Congress to get federal legislation passed, during an April 26 earnings call.

Etsy CEO Josh Silverman said in a June 21 statement that “By vacating Quill, we believe there is now a call to action for Congress to create a simple, fair federal solution for microbusinesses.”

Also on June 21, eBay released a statement urging “Congress to step in and provide clear tax rules, with a strong small business exemption, to help small businesses take advantage of the Internet to grow and create local jobs.”

Neither Etsy or eBay immediately responded to requests for comment.

What Would It Take?

With the November midterm elections looming, state and local tax practitioners argue that Congress just doesn’t have the bandwidth to take on online sales tax legislation, which takes a seat behind the debate over a national border wall, immigration reform, and balancing the national budget.

However, Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc.—a group that oversees a program under which sellers collect tax voluntarily and remit it to the 24 state participants—said if states become overly aggressive with collection enforcement implementation, Congress could be triggered to act.

“Right now we are at a point where states are being very deliberately careful when enforcing their economic nexus models,” Johnson told Bloomberg Tax.

The majority in Wayfair suggested strongly that South Dakota’s economic nexus law would pass constitutional muster; the state’s model imposes the tax collection threshold at 200 separate transactions or $100,000 in in-state sales. But the court stopped short of formally declaring that South Dakota’s law, which dozens of states have mimicked already, was valid in the absence of Quill. The court just made clear that Quill was no longer part of any commerce clause test for when states may impose taxes.

The South Dakota Supreme Court on Aug. 9 sent the groundbreaking case back to the state Circuit Court, which may now conduct additional legal proceedings. One possibility is that the court will dissolve the injunction it put in place barring South Dakota from enforcing its economic nexus thresholds for remote sellers to collect and remit taxes on transactions. The Circuit Court is expected to bless the economic nexus model soon, if the state doesn’t first reach a settlement with companies in the case—Wayfair, Newegg Inc., and Overstock.com Inc.

Retroactivity as a Trigger

Johnson said that if multiple states pursue retroactive tax collection, Congress could be triggered to intervene.

“It’s hard to say just how many states would have to push for retroactivity for Congress to act, but I’m hopeful no state goes down that path,” Johnson said. “I think states are really taking notice of the recommendations of the Supreme Court.”

Kirkell agreed with Johnson and said that if states want to do everything they can to keep Congress out of the online sales tax space, then they will avoid retroactivity at all costs.

While many states are avoiding the retroactivity issue and issuing statements intended to assuage those fears, Florida is taking a different tack.

The Florida attorney general recently asserted that state attorneys can apply the result in Wayfair retroactively to defend against refund claims or otherwise win litigation challenging taxes assessed in prior years.

Wayfair controls the outcome of this matter, and there is no reason that case should not be applied retrospectively as well as prospectively,” according to an Aug. 9 state court filing signed by Attorney General Pamela Bondi and William H. Stafford III, a senior assistant attorney general.

The filing came in a case involving a refund of tobacco excise taxes and in which the tobacco distributor is arguing it never had a physical presence in the state.

Florida is the latest state to step into the retroactivity spotlight. Others have come close to pursuing the back taxes, such as Hawaii, but have backtracked pursuits after attention from state organizations and media.

Many states potentially leave the door open for retroactivity. In fact, only two of the 25 states that have enacted economic sales tax nexus models—South Dakota and Maine—include language that exclusively bars the imposition of retroactive back taxes.

Standardize Physical Presence?

The most recent bill to hit either chamber, the Stop Taxing Our Potential (STOP) Act (S. 3180), introduced by Tester after the Wayfair ruling, says a state may not impose an obligation on a seller to collect and remit sales tax unless a physical presence is established by a person’s business activities.

The STOP act nearly mirrors the language of the No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), introduced by Rep. Jim Sensenbrenner (R-Wis.). The NRRA only differs in that it defines the word “regulate” and “tax” in relation to the law.

The bill says the term “regulate” means to impose a standard or requirement on the production, manufacture or post-sale disposal of any product sold or offered for sale in interstate commerce as a condition of sale in a state when:

MFA/RTPA: Understanding Differences

Both the Marketplace Fairness Act of 2017 (S. 976) (MFA) and the Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA) sought to kill Quill, but the bills are uniquely different.

The MFA requires that states must simplify their sales tax laws and presents them with two options for doing so.

Option one: A state must join the SSUTA.

Option two: States must meet the five following simplification mandates:

  • notify retailers in advance of any rate changes within the state;
  • designate a single state organization to handle sales tax registrations, filings, and audits;
  • establish a uniform sales tax base for use throughout the state;
  • use destination sourcing to determine sales tax rates for out-of-state purchases (example: a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there); and
  • provide free software for managing sales tax compliance and hold retailers harmless for any errors that result from relying on state-provided systems and data.

The RTPA, sponsored by Rep. Kristi Noem (R-S.D.), aligns with the MFA at first glance, but includes several additional protections for sellers, according to the International Council of Shopping Centers. These additions include but are not limited to: audit protection—so that sellers can’t be audited by states where they don’t have physical presence—and small seller phase-in—an exception that starts at $10 million and is phased over three years.

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