Federal Digital Tax Bills Frozen as High Court Case Heats Up

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By Ryan Prete

State tax watchers are skeptical that federal legislation aimed at addressing remote sales tax collection will move while there is the possibility that the U.S. Supreme Court will review a South Dakota decision that struck down a statute requiring out-of-state sellers to collect sales tax.

The South Dakota Supreme Court affirmed Sept. 13 that the state’s “economic nexus” law, S.B. 106 (codified as S.D. Codified Laws Chapter 10-64), is unconstitutional under Quill Corp. v. North Dakota—the 1992 U.S. Supreme Court decision that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. The statute would require out-of-state sellers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax ( State v. Wayfair Inc. , 2017 SD 56, 2017 BL 324005, S.D., No. # 28160, 9/13/17 ).

South Dakota officials have indicated they will appeal to the U.S. Supreme Court, which sets a deadline for a petition for review within 90 days after entry of the judgment. In the meantime, three remote sales tax bills remain pending in Congress:

  •  The Marketplace Fairness Act of 2017 (S.976) (MFA): The proposal would permit states to require out-of-state sellers and online vendors to collect tax on in-state sales. Sponsor Sen. Mike Enzi’s (R-Wyo.) staff told Bloomberg BNA that there are no planned hearings or votes on the bill.
  •  The Remote Transactions Parity Act of 2017 (H.R. 2193) (RTPA): Like the MFA, the RTPA allows states to collect tax on in-state sales from sellers without an in-state physical presence. There are no scheduled hearings for the bill and there is no timetable for a possible House vote, according to Sponsor Rep. Kristi Noem’s (R-S.D.) staff.
  •  The No Regulation Without Representation Act (H.R. 2887) (NRRA): The NRRA would, in part, codify the Quill decision. The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a July 25 hearing on the measure. Sponsor Rep. Jim Sensenbrenner’s (R-Wis.) staff told Bloomberg BNA that there are no updates on the bill’s timeline for a potential House vote.

‘Difficult Path Forward’

Michael Mazerov, senior fellow with the State Fiscal Project at the Center on Budget and Policy Priorities, told Bloomberg BNA that it’s doubtful any of the bills would receive a vote in their respective chambers this session.

“At this point, the only scenario in which I can see likely congressional action next year is one in which the Supreme Court reverses Quill, and some members move to reverse such a decision or impose the kind of uniformity and simplification requirements that are included in MFA and RTPA,” Mazerov said.

“Of course, the states would fiercely resist that, with the argument that the industry had had its chance to agree to fair ground rules for collection and chose instead to milk the competitive advantage of not collecting tax as long as possible,” Mazerov said. “I don’t think there was much of a chance with these bills to begin with.”

Jamie Yesnowitz, state and local tax practice and National Tax Office leader for Grant Thornton LLP, told Bloomberg BNA in an email that he doesn’t expect any sort of congressional response until there is some certainty on how the U.S. Supreme Court will act.

“With the continuing tension that three bills on the same subject bring, I think it is difficult to see a path forward to a full vote in the House or Senate on any of these bills (or another alternative) until very late in the current Congressional session at the earliest,” said Yesnowitz, a member of Bloomberg BNA’s State Tax Advisory Board.

Tax Reform Impact?

Richard D. Pomp, the Alva P. Loiselle professor at the University of Connecticut School of Law, told Bloomberg BNA that federal tax reform could play a hand in the digital sales tax debate.

“I doubt any of these bills will get a hearing this session,” Pomp, also a member Bloomberg BNA’s State Tax Advisory Board, said in an email. “But I can imagine a situation where a federal tax reform proposal hurts the states (such as removing or curtailing a deduction for some or all of state and local taxes) and the quid pro quo will be to make it up to the states by having Congress overturning Quill.”

Streamlined Effect

The Streamlined Sales Tax Project is keeping a close eye on a U.S. Supreme Court move after the South Dakota high court’s decision.

“We are and have been big supporters of the MFA and RTPA, but a U.S. Supreme Court decision in favor of the state which highlights uniformity as a beneficial move would be the best case scenario for the initiative,” Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, Inc. (SSTGB), told Bloomberg BNA. The language of both the MFA and RTPA authorizes member-states under the Streamlined Sales and Use Tax Agreement to require sales tax collection from out-of-state sellers.

“It really comes down to the U.S. Supreme Court opinion, but I am confident that the SST will be here to stay, and will continue to serve the business community and allow for collection certainty,” Johnson said.

Twenty-four states, representing more than 31 percent of the nation’s population, have adopted the simplification measures of the Streamlined Sales and Use Tax Agreement, which “aims to simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance,” according to the SSTGB website. As of Sept. 1, 3,600 companies participate in the Streamlined Sales Tax Initiative to collect sales tax regardless of physical presence, according to Johnson.

Steve DelBianco, executive director of NetChoice, a Washington, D.C.-based internet commerce trade association, told Bloomberg BNA that if “Congress were able to step up and stop the chaos occurring in many states” by passing the NRRA, “SST could become a vehicle for standardization.”

DelBianco also believes that Congress is in a holding pattern amid possible U.S. Supreme Court action, and that if Quill were overturned, “it would push Congress to act to the certain outcry of the business community.”

Lawsuits designed to challenge Quill are also pending in Alabama, Indiana, Tennessee, and Wyoming.

$211 Billion Lost

The Marketplace Fairness Coalition released Sept. 21 an analysis detailing that over the next five years, the nation could lose $211 billion because of uncollected sales tax on remote transactions. The coalition’s report used data from a National Conference of State Legislatures report indicating that an estimated $26 billion in sales and use taxes went uncollected in 2015.

The coalition described its methodology in a statement emailed to Bloomberg BNA.

“Our calculation assumes that ecommerce (52 percent) and non-ecommerce (48 percent) portions of remote sales will continue to grow at the historical 15 percent and 5 percent annual rates, respectively, through 2022. The distribution of nationwide revenue loss among states is based on GDP. That is, the allocation of uncollected sales tax will remain unchanged as remote sales grow,” the coalition said.

To contact the reporter on this story: Ryan Prete in Washington at rprete@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

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