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
Where are we now?
That’s a question on millions of minds as companies like Wayfair Inc. and Overstock.com Inc., sellers on those marketplaces and on e-commerce behemoth Amazon.com Inc., and states all try and navigate the new world of state online sales taxation.
After the U.S. Supreme Court’s pivotal June 21 ruling in South Dakota v. Wayfair, which removed a major hurdle to when states can constitutionally tax remote sellers, there has been more uncertainty than answers. And one prevailing complication: states are moving quickly, and companies have to try and keep up.
The Wayfair ruling is front at center at the Multistate Tax Commission’s annual week-long meeting, which began July 23. And two events are most in focus right now for the group, which tries to shape state tax activity via model legislation, amid a frenzy of state-side activity since the Wayfair decision:
The focus of the House Judiciary hearing is trying to determine “what the landscape is” post-Wayfair, Todd A. Lard, partner with Eversheds Sutherland (US) LLP in Washington, told Bloomberg Tax July 23. Congress wants to know “where the court left it and what the new standard is.”
So where does that leave New York and the growing list of states expected to copy the South Dakota online sales tax model? Or the dozens that already have done so and whose laws already are in effect (or will be soon)? Not to mention the sellers in those states, including large companies like Amazon and eBay Inc. that have pushed for congressional action before and after Wayfair?
“The court essentially gave its blessing to the economic nexus model in South Dakota,” Richard Cram, director of the MTC’s National Nexus Program, said July 23. Many are now passing or shoring up economic nexus laws, and few, if any, are looking at imposing a retroactive tax collection liability prior to the ruling. “Economic nexus is probably the future,” and other models like “click-through nexus” and reporting and notice laws are no longer needed, he said.
A formal settlement of the South Dakota case is unlikely to affect New York and other states, or the frenzy of state-side activity, but technically it would leave all concerned parties without a legally binding answer on whether the South Dakota law is, in fact, constitutional.
In Wayfair, the high court tossed out Quill Corp. v. North Dakota, its 1992 physical presence threshold for remote sales taxation, but remanded the remaining issues in the case, including, most importantly: whether the South Dakota law actually is constitutional.
The 5-4 majority in Wayfair suggested strongly that South Dakota’s law would pass constitutional muster, but it didn’t declare the law as valid in Quill’s absence, leaving it to lower courts to rule on the constitutionality of the state’s economic nexus model—a law that imposes tax collection duties based on the threshold of sales that the seller makes within a state. Wade LaRoche, a spokesman for the South Dakota Department of Revenue, said the expectation is that the South Dakota Supreme Court will send the case back to the circuit court that blocked the law at the companies’ request, based on its conflict with Quill.
LaRoche confirmed to Bloomberg Tax July 23 that the parties are engaged in settlement negotiations in the case that was sent back to the South Dakota Supreme Court.
He said that Andy Gerlach, secretary of the South Dakota Department of Revenue, told the Streamlined Sales Tax Governing Board Inc. during an emergency meeting last week that he expects the circuit court to hear the case in mid-August. No formal court date has been set
Meanwhile, all state-side watchers are on edge as Congress is about to re-enter the discussion after years of veiled threats to do something about how states tax online sales. And one predominant concern for all involved is: Might the Quill standard come back?
Andrew Moylan, executive vice president for the National Taxpayers Union Foundation, who is among those scheduled to testify, said he is confident that Congress could work toward enacting a law that could codify Quill‘s physical presence rule—consequentially reversing June’s high court Wayfair ruling—but didn’t specify an estimated timeline of when such a law could become a reality.
“For years, there was no urgency for Congress to act on this issue, but that urgency is here now, it is my hope that the hearing consists of a sober and calm discussion, and it is my hope that this is the first of several hearings on the effects of the Wayfair ruling,” he told Bloomberg Tax.
Rep. Robert W. Goodlatte (R-Va.), the soon-to-retire chair of the Judiciary Committee, supports a bill that would codify Quill. The No Regulation Without Representation Act of 2017 (H.R. 2887) (NRRA), sponsored by Rep. Jim Sensenbrenner (R-Wis.), was introduced before the U.S. Supreme Court ruling.
Lard said it’s likely committee members will give their support for a legislative solution to “codify Quill” or otherwise shore up the physical presence standard, given Goodlatte’s support for that bill. “He’s always been pretty clear he wants tight boundaries around the states,” Lard said of Goodlatte, who will retire in November.
Goodlatte, often pegged by members in the state and local tax community as the biggest hurdle to e-commerce reform, said last week that online sales tax is a “complicated issue” the Supreme Court should have left to Congress to resolve. Chief Justice John Roberts authored a four-justice dissent advancing this point, which the U.S. Supreme Court in Quill also did.
“The ability to regulate interstate commerce has always been a legislative issue,” Goodlatte said. “Our Founders were also clear on the issue of ‘no regulation without representation.’ Unfortunately, the Supreme Court’s recent decision in the Wayfair case violates this founding principle.”
However, federal legislation on digital taxation has languished for years without chamber-level or any real action despite Amazon saying Congress should act on this issue. At least four bills are pending in Congress.
It’s unclear which of those will be on the table at the Judiciary Committee hearing, but “the committee is tuning-in to the growing chorus of state tax collectors demanding back taxes, interest, and penalties,” Steve DelBianco, president and CEO of NetChoice Inc., told Bloomberg Tax. “There’s enough noise here for Congress to step in and say, stop the music.”
DelBianco said in a statement late July 23 that “because of Wayfair, businesses have no clear test to determine whether they are obligated to pay a foreign state’s sales tax.
“The Commerce Clause is just as necessary now as when the constitution was written, and Congress must protect interstate commerce in the digital age,” DelBianco continued. “The time to act is now, and the longer Congress leaves the state tax playpen unsupervised, the worse the mess will be for American small businesses and consumers.”
He said the U.S. Supreme Court in Wayfair “misunderstood the true audit liability faced by America’s small businesses and there’s no guarantee that tax software services will be paid for by the states.”
Wayfair could have the effect of “firing up” both sides in the debate over online taxation, Lard said: Those who support the physical presence standard as a way to rein in the taxation authority of states, and those who support proposed legislation such as the Marketplace Fairness Act, which provides guidance on how states can tax remote sales.
The witness list for the hearing includes:
Also on the list are Joseph R. Crosby, principal with MultiState Associates Inc.; and Andrew J. Pincus, partner with Mayer Brown.
Moylan said the atmosphere in the hearing room is hard to predict, but that he hopes that Congress can “address the issues that have arisen from the Wayfair ruling.”
“I have strong views towards the ruling, and I’ll be focusing on the many unanswered questions at hand, and even some of the questions that went unasked in the oral arguments back in April,” Moylan said,
The pending congressional bills are:
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