A Primer: The Congressional Battle Over Digital Sales Tax

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By Jennifer McLoughlin

Sept. 16 — States and retailers hope Congress will break its pattern of inaction on online sales tax authority before wrapping up for the year. But it's anyone's guess whether legislators will find the time or the momentum.

Over the past year, several states have launched a loosely coordinated campaign challenging federal law that limits their ability to tax out-of-state sellers (128 DTR J-1, 7/5/16).

Against this backdrop, four federal proposals are competing to define the scope of states' taxation power over remote vendors. However, Congress has failed to unite behind one plan, leaving states and retailers in a perpetual clash over cross-border taxation.

Bloomberg BNA details below what has happened and what is at stake for states and retailers.

What Is the Dispute?

The provenance of the issue is a nearly 25-year-old U.S. Supreme Court opinion, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which has incited debate since it was decided. The divisive case prohibits states from imposing sales and use tax collection obligations on businesses without an in-state physical presence.

States and “Main Street” stores have increasingly panned the Quill framework as misplaced in a modern marketplace that has thrived with the explosive growth of electronic commerce. Able to reach consumers across state lines without an in-state footprint, remote retailers can avoid sales tax liability while peddling their wares.

States have bemoaned this tax break as permitting out-of-state sellers to take advantage of the local customer base without contributing to the state's sales tax base. Also at play are tensions relating to federal preemption of states' governance over their revenue systems, with organizations such as the National Conference of State Legislatures and the National Governors Association emphasizing the importance of preserving states' fiscal sovereignty.

Local brick-and-mortar retailers have protested the unfair price advantage for remote retailers, who don't have to account for the state tax.

What Is Congress Considering?

Three bills on the issue have been introduced—one in the Senate and two in the House:

Destination-Based Sourcing

A destination-based system compels remote retailers to collect taxes on transactions according to the tax base and rate of the consumer's location.

  •  The Marketplace Fairness Act (MFA) (S. 698) , sponsored by Sen. Michael Enzi (R-Wyo.), proposes a destination-based system. States would have authority to require sales tax collection from remote retailers—with a small seller exception—so long as they join the Streamlined Sales and Use Tax Agreement (SSUTA) or take legislative measures to simplify their sales tax systems.
  •  The Remote Transactions Parity Act (RTPA) (H.R. 2775), sponsored by Rep. Jason Chaffetz (R-Utah), likewise proposes a destination-based system and would impose the same SSUTA and simplification requirements. The RTPA does vary from the MFA, such as with the small seller exception, audit limitations and provisions relating to certified software providers.
  •  The No Regulation Without Representation Act (H.R. 5893), sponsored by Rep. Jim Sensenbrenner (R-Wis.), would maintain the status quo by codifying the physical presence rule in Quill.

Origin-Based Sourcing

An origin-based system compels remote retailers to collect taxes on transactions according to the tax base and rate of the retailer's location.

Another proposal, though not introduced, is the Online Sales Simplification Act (OSSA). Rep. Robert Goodlatte (R-Va.) recently released an updated discussion draft of his plan, which is a hybrid origin-based system that bases the taxation of remote purchases on the seller's location, but at the tax rate of the consumer's location. A seller would remit the tax to its origin state, which would in turn remit the tax to a clearinghouse for distribution to the appropriate destination state. Provisions vary for those states not participating in the clearinghouse.

What Do States Think?

States have long adopted tax regimes to capture revenue lost to remote sales—including affiliate, click-through, notice/reporting and most recently, economic nexus—manifesting an intensifying frustration with the Quill physical presence standard.

Sensenbrenner's “keep Quill” bill “would continue the disparate treatment of on-line online retailers and bricks/mortar retailers,” Louisiana Secretary of Revenue Kimberly Lewis Robinson told Bloomberg BNA in an e-mail.

The bill has also raised the question of whether it was merely a tactical maneuver to reign in states directly challenging Quill, most notably Alabama and South Dakota. Litigation is pending over their economic nexus regimes mandating sales tax collection if a remote retailer's sales satisfy a monetary or volume threshold—notwithstanding a lack of physical presence.

“Sensenbrenner's keep Quill bill seems like a warning shot aimed at states like Alabama who are pushing back against Quill,” Joe W. Garrett Jr., deputy co-commissioner with the Alabama Department of Revenue, told Bloomberg BNA in an e-mail. “We hope it's not a proposal that Congress takes seriously.”

So where do states stand on the other bills?

•  OSSA. Many states are still in the early stages of assessing the impact of Goodlatte's latest proposal, but concerns and criticism have emerged over the approach.

Alabama Revenue Commissioner Julie Magee has expressed disappointment with the proposal, saying she thinks it isn't a serious effort at promoting compromise and that it may deter states from pursuing a federal legislative solution in favor of local laws and litigation.

“The Online Sales Simplification Act, I think, is a real misnomer,” Mary Petersen, Vermont's Commissioner of Taxes, told Bloomberg BNA, adding that the approach is unworkable. Rather, she said a destination-based approach makes “real sense.”

•  MFA. Several state officials have voiced support for the MFA, including South Dakota Gov. Dennis Daugaard (R) and revenue officials from Alabama, Louisiana, Tennessee and Vermont. The MFA passed the Senate in 2013, but stalled in the House.

“We believe it provides the most straightforward and effective way to ensure sales tax collection from remote sellers,” Justin Moorhead, a spokesperson for the Tennessee Department of Revenue, told Bloomberg BNA in a Sept. 7 e-mail, noting that the DOR has supported the MFA since its inception.

•  RTPA. Many officials are also supportive of the RTPA, including Daugaard and Robinson. However, some harbor reservations with the bill—but haven't shut the door on it.

“While Commissioner Magee has been publicly critical of the Chaffetz bill, it's obviously not that far away from MFA,” Garrett said. The Multistate Tax Commission “and other state organizations have made suggested proposals/amendments that would alleviate her concerns with it.”

And, although many believe the MFA and RTPA provide the best framework, those regimes may still fall a little short of what states want.

“Either legislation would establish common sense rules for taxing remote sales, at the same time leveling the playing field between in and out of state internet and brick-and-mortar businesses, simplifying sales and use tax collection,” Anna Davis, director of federal relations for the National Governors Association, told Bloomberg BNA. She added that the bills give the most flexibility for states to decide how they want to tax, but don't completely satisfy all NGA key principles applying to federal legislation on the issue—notably the principle that Congress shouldn't interfere with state revenue systems.

What Do Retailers Think?

Rather than call for the survival of Quill, many remote retailers have increasingly embraced the concept of taxing cross-border sales.

The common chorus among retailers has called for e-commerce legislation that is workable and fair. But diverging interests—including those among mega-internet retailers, smaller online companies, catalog companies and local brick-and-mortar stores—have fashioned competing factions with varying support for the federal e-retailer proposals.

•  OSSA. In the wake of Goodlatte's latest discussion draft, more than 100 businesses and organizations signed a letter backing the proposal, including Overstock.com Inc. and Blue Nile Inc. Other signatories include the Direct Marketing Association—which recently sought certiorari with the U.S. Supreme Court, challenging Colorado's reporting mandate for remote retailers—and the American Catalog Mailers Association and NetChoice—both embroiled in litigation over South Dakota's economic nexus regime.

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 (63 DTR H-1, 4/1/16).

•  MFA.Numerous vendors and trade associations have long endorsed the MFA, including Amazon and Wal-Mart Stores Inc.

•  RTPA. The comparable RTPA also enjoys broad support, with several of the MFA supporters appearing to back the bill.

Will Congress Act This Session?

With just a few weeks remaining in the congressional session, and a lame-duck session following the November elections, this Congress is pressed for time in advancing one or more of the digital sales tax bills. And there is no firm sign that Congress will take imminent action.

In an agreement earlier this year, Senate Majority Leader Mitch McConnell (R-Ky.) promised to hold a 2016 vote on the MFA in exchange for Sen. Richard Durbin (D-Ill.) lifting objections to a vote on the permanent Internet Tax Freedom Act. However, three senators from states without a sales tax have pledged to object to any 2016 effort advancing legislation imposing sales tax compliance burdens on small online businesses (79 DTR G-2, 4/25/16).

Some think Goodlatte will formally introduce his bill this session, but stakeholder feedback will likely dictate the timing (166 DTR G-6, 8/26/16).

Some lawmakers and practitioners have indicated that Goodlatte has obstructed competing bills from moving to the House floor.

What Will Congress Choose?

Four competing tax structures haven't inspired optimism among practitioners and tax administrators, with some suggesting that the series of proposals demonstrates a nonpartisan divide that undermines the chance of success for any one plan (151 DTR H-7, 8/5/16).

The MFA has 23 co-sponsors, and the RTPA has 67 co-sponsors. The RTPA has also drawn praise from several senators applauding the bipartisan effort as an encouraging step.

No representative has jumped on Sensenbrenner's “keep Quill” bill. And until Goodlatte's bill is released, the level of support remains to be seen.

“Rather than comparing the four bills and choosing one that might have a greater chance than the others to be enacted in its original form, I think it’s reasonable to conclude that in order to get a federal resolution on this issue, some sort of compromise effort between the interested parties that have helped to craft these bills will need to take place,” Jamie Yesnowitz, a Washington-based principal with Grant Thornton LLP's State and Local Tax practice, told Bloomberg BNA in an e-mail.

He added that “perhaps a public meeting or conference at which everyone involved in this effort is afforded the opportunity to participate would result in the development of an approach that could get broad-based support in Congress.” While perhaps a painstaking process, it could be a palatable alternative to the federal bills languishing.

Outlook Without Congress Stepping In?

Although one bill hasn't clearly emerged as the leading contender, some say that the states' escalating “kill Quill ” campaign will ultimately compel congressional action. And the U.S. Supreme Court may prefer it that way.

“The Court does not want to keep hearing Quill-type cases,” Richard D. Pomp, the Alva P. Loiselle professor at the University of Connecticut School of Law, told Bloomberg BNA in an e-mail. “I think the Court would prefer for Congress to act and impose uniformity across the country.”

In a 2015 concurring opinion over a procedural dispute in Direct Mktg. Ass’n v. Brohl (DMA), Justice Anthony M. Kennedy urged the “legal system” to bring a case that re-evaluates the high court's earlier precedent, including Quill. His call for a challenge cautioned against further delay because of technological advancements and consumer practices.

Kennedy's concurrence emboldened states, driving Alabama and South Dakota to adopt their respective laws as a vehicle to incite litigation leading to the high court. Some think the prospect of the Supreme Court intervening may deter Congress from finding a solution.

And should the Supreme Court abrogate Quill's physical presence rule, with a void of federal legislation governing the issue, the widespread outlook is that states will start implementing individual sales tax regimes for remote retailers. From that, more litigation is likely to arise.

At that point, as Utah Sen. Curtis Bramble (R) has warned, states may push back on future congressional proposals.

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

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

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

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