Multistate Group Tells Congress to Hold Off on Digital Tax Reform(1)

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By Ryan Prete

The Multistate Tax Commission is officially telling Congress to hit the breaks on digital sales tax legislation.

Through a newly adopted July 25 resolution, the MTC is urging Congress to refrain from enacting a law that would reverse Wayfair, a pivotal U.S. Supreme Court ruling that removed a major hurdle to when states can constitutionally tax online sales.

Resolution 2018-01 asks for Congress’s restraint as states and other stakeholders work through the implications of Wayfair and cites Congress’s inability to pass digital taxation legislation in the past

“As a result,” the resolution states, “the states have lost billions in taxes that were owed, and Main Street businesses and local development has suffered.” The MTC adopted the language during its 51st annual meeting in Boston.

The Supreme Court’s June 21 ruling in South Dakota v. Wayfair—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states can tax remote sales—has many states looking to expand their authority over online sales taxation. 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.

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.

And beyond a lot of clashing opinions and ideas, a July 24 House Judiciary Committee hearing didn’t result in a clear road map for what’s ahead in an area where states have been increasingly active since a groundbreaking June 21 U.S. Supreme Court ruling.

After Midterms

Richard Cram, director of the MTC’s National Nexus Program, told Bloomberg Tax he thinks Congress has too much on its plate to enact an online sales tax law before 2019.

“I would be surprised if anything happens before the midterm elections in November,” he said. “After the midterms, we will have to take the temperature of the whole situation and see where we are at.”

Cram said he hopes the next Congress will be less likely to push a law that would overrule Wayfair.

Adopted Section 18 Amendments

The MTC also adopted amendments on how bank holding companies and their subsidiaries calculate the tax that is owed, or must be apportioned, within a state.

The group adopted proposed amendments under Model Regulation IV, Section 18 of the Uniform Division of Income for Tax Purposes Act (UDITPA). The MTC developed UDITPA as a method of dividing income among the several taxing jurisdictions for tax purposes. A significant number of states exclusively use a receipts factor to apportion taxable income within their state.

The first rule adopted July 25 amends rule IV.18.(c), about how to determine the receipts factor if a taxpayer’s receipts, as defined by the business activity, are less than 3.33 percent of its gross receipts. The proposed rule provides that to be included in the receipts factor under the new section, gross receipts must give rise to apportionable income included in the tax base.

The second rule concerns bank holding companies and subsidiaries. It states that for any entity more than 50 percent owned by a bank holding company or savings and loan holding company, receipts would be included in the receipts factor denominator and assigned to the receipts factor numerator in a state to the extent they would be included under the MTC’s Financial Institutions Model Statute.

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

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

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