Sales Tax Slice: Will a New Bill on the Hill Codify Quill?



Boxes

Last week’s hearing announcement for the No Regulation Without Representation Act (H.R. 2887) made headlines as the first to address online sales nexus in three years. This is significant because closely-watched competing bills like the Marketplace Fairness Act[1] and Remote Transaction Parity Act have been notably sidelined by the U.S. House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law. The bill, which aims to codify Quill, is attempting to beat back a surge of recent state measures authorizing the collection of sales tax across state borders. If passed, as reported by Bloomberg BNA’s Jennifer McLoughlin, states would be prohibited from imposing collection and reporting obligations on e-retailers and out-of-state sellers making sales within a state if the seller does not have physical presence in that jurisdiction.

State autonomy is a concern shared by both bill proponents and opponents. Bill supporters believe that “regulations that constrict and tax businesses outside of state borders challenge state sovereignty and federalism while making it incredibly difficult for small businesses to flourish under the backbreaking weight of regulations” Some opponents, on the other hand, have also cited constitutional principles of state autonomy suggesting that Congress  is encroaching on states’ sovereignty. 

A review of recent state legislative activity may explain the renewed push for this type of congressional action on the issue.

Back in November, the co-sponsor of the bill, Rep. Jim Sensenbrenner (R-Wis.), wrote an op-ed for The Hill where he called out South Dakota and Alabama for “ignoring Quill and passing laws that require online retailers to pay state taxes.” He feared more states would join. And they did. 

Over the last year, states have escalated the fight to stabilize their eroding tax base using directives, regulations, and legislation. The ballooning market share of commerce that online retailers enjoy has resulted in revenue losses for states, who are unable to enforce collection of sales tax if retailers do not have physical presence in their state. 

The formula triggering “economic nexus” adopted by many of these states generally involves meeting an annual dollar threshold of sales (ranging from as little as $10,000 in Washington to $500,000 in Massachusetts),[2] and a minimum number of separate transactions (generally 200) in the state. A few states require both elements, while others require only one. 

Although Alabama and South Dakota are credited with leading the way, only Alabama’s regulation has actually gone into effect. Its “simplified remittance program” has collected $39.1 million this fiscal year, as reported by Bloomberg BNA’s Ryan Prete. Meanwhile, South Dakota’s law has been suspended, and is awaiting review in its state supreme court. It might not be a coincidence that the president-elect of the National Conference of State Legislatures, an organization that openly opposes the No Regulation Without Representation Act, is a state senator from South Dakota (Sen. Deb Peters). Of the four witnesses called to testify during the July 25 hearing on H.R. 2887, she was the lone witness not in favor of the bill.

While many states would welcome a direct challenge of their economic nexus laws, viewing it as a path to the Supreme Court and a reconsideration of the Quill decision, not all are interested in a legal battle. North Dakota, for example, installed in its economic nexus bill, an effective date that is contingent upon “the United States Supreme Court issu[ing] an opinion overturning Quill v. North Dakota … or otherwise confirming that a state may constitutionally impose its sales or use tax upon an out-of-state seller.” Vermont has a similar provision in its bill.

This issue is of particular concern for states that do not impose an income tax, since they must rely more heavily on revenue from sales tax. Among these, Washington, the most recent state to join the ranks, estimates an “additional $1 billion over the next four years” as a result of their online sales tax expansion. In contrast, enforcement of Tennessee’s economic nexus regulation, which was set to go into effect in July, has been suspended by a local court pending a challenge earlier this year, according to Bloomberg BNA’s Che Odom.

Not all states have been successful making it past their first hurdle, however. Similar measures establishing economic nexus came close in Maine, Florida, Utah, Georgia, and North Carolina. Interestingly, Georgia’s attempt would have used its increase in sales tax revenue to finance an income tax cut.

Whether this hearing is an indication of congressional willingness to finally act on this issue is yet to be seen. If so, H.R. 2887 is probably not what the states had in mind. It is certain, however, that we will see more attempts by the states to collect tax on online sales until there is finality on the issue at the federal level.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the No Regulation Without Representation Act has a future? Will the states continue to try to expand their definition of nexus if the bill becomes a law?

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[1] This session, the Marketplace Fairness Act has only been introduced in the U.S. Senate.

 

[2] Massachusetts has revoked Directive 17-1 and intends to promulgate regulations instead.