State of Wayfair: Bill Before Congress Sets Limits on Collection

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 Tripp Baltz

Might Congress take up a bill designed to restrict how states move forward with remote sales tax collection?

In the aftermath of the Wayfair ruling, few are expecting Congress to wade back into the waters of absolutely allowing states to compel remote sellers to collect and remit states sales and use taxes—or to definitively prevent them from doing so. But refining how they do it might be another matter.

Entering the scene is the Protecting Businesses from Burdensome Compliance Cost Act, introduced Sept. 7 by Rep. Bob Gibbs (R-Ohio), with measures Gibbs said are designed to “ease the burden for out-of-state vendors” working to comply with sales and use taxes in other states.

One provision of the bill would bar states from having a “start date” earlier than Jan. 1, 2019, for their collect-and-remit requirements—although many states are going with earlier deadlines of Nov. 1, Oct. 1, and even July 1.

‘Impossible to Navigate’

“The Wayfair decision opened the door for a complex web of state and local sales taxes that would be impossible for small businesses to navigate,” Gibbs said in a statement. “Complying with a needlessly convoluted tax structure will raise prices for consumers.”

The June 21 South Dakota v. Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the U.S. Supreme Court’s 1992 physical presence threshold for when states could 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 court didn’t rule on the validity of South Dakota’s law in the absence of Quill, and one of three things could happen soon to allow the South Dakota law to go into effect: (1) a circuit court could lift an injunction pinning down the law, (2) the Legislature could approve a bill during a planned Sept. 12 special session that would clear the injunction, or (3) the state and the companies in the case could settle.

Meanwhile, dozens of states are passing versions of South Dakota’s law or enforcing existing nexus laws and rules they already have on the books.

Under Gibbs’ bill, states wouldn’t be allowed to retroactively collect sales taxes for previous remote sales where no nexus existed before the Wayfair decision. The bill also would give remote sellers the ability to remit any sales taxes to a single location. It also would require states that want to collect from remote vendors to have a uniform tax rate that can’t be higher than the highest combined rate of all local and state taxes.

Recouping Costs

Streamlined states to nonmember states: You can use our system, but we’re going to have charge you.

States pay fees to be full or associate members of the Streamlined Sales Tax Governing Board Inc., which oversees and amends the Streamlined Sales and Use Tax Agreement on remote sales tax collection.

Post-Wayfair, the Streamlined group has invited nonmember states to use the board’s Central Registration System, where vendors can—with a single registration—get a sales tax account and begin to collect and remit in all Streamlined member states.

The participating states have paid a lot of money over the years for the maintenance, support, updates, and enhancements to the Central Registration System. Nonmember states will have to share that burden going forward, following the governing board’s Sept. 10 approval of a proposal that lays out charges for nonmember states “to recover a portion of the costs the Streamlined states have already invested” in the system.

The board put off a vote on a second resolution governing how sellers select the states in which they want to register. The board said the proposal needs more work.

Upper Hand in Massachusetts

Massachusetts apparently thinks the Supreme Court decision in Wayfair gives it the upper hand in its legal battle with online retailer Crutchfield Corp.

Crutchfield sued the Massachusetts Department of Revenue in a Virginia court in October 2017 over whether the Bay State’s “cookie nexus” remote sellers regulation is valid. The department had originally agreed to turn over internal documents and emails about the formation and implementation of its remote sales regulation, which relate to the question of whether the Virginia Circuit Court for Albemarle County has jurisdiction.

In a recent court motion, Crutchfield said the department decided not to provide the documents because “circumstances have dramatically changed due to the Wayfair decision,” according to the supporting brief filed with the motion.

“The Defendants’ blatant reversal of course on discovery is plainly improper,” Crutchfield’s attorney, Matthew Schaefer of Brann & Isaacson, the firm representing Wayfair in the South Dakota case, argued in the brief.

Crutchfield says the “cookie nexus” regulation creates an undue burden on interstate commerce, is pre-empted by the International Tax Freedom Act, and violates restraints on state authority under the federal dormant commerce clause as interpreted by the U.S. Supreme Court in Quill.

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