By: Karen T. Syrylo, CPA
September 25, 2018
Following the Supreme Court’s June 21, 2018 ruling in South Dakota v. Wayfair, some members of Congress have demonstrated interest in giving directions for the post-Wayfair world of state sales tax compliance. There’s no question that for many businesses the implementation of the “economic nexus” standard, now that the Court has removed the “physical presence” nexus requirement, will be complex and costly; the states’ rules enacted so far have significant variations in the thresholds and implementation dates, and many questions remain to be answered. Will Congress step in to bring some uniformity, some simplification? A Congressional hearing clearly demonstrated the Committee Chairman’s preference and concerns; and two pieces of legislation seek to deal with details and restrictions. There is likely to be more discussion, at least, but the probable results are difficult to predict. As you’ll see in our item below, there are also members of Congress who believe that they should not get involved. And, no surprise, state legislators are asking that Congress not impose its own requirements. Here’s a summary of what we’ve seen from Washington so far.
* House Judiciary Committee hearing
On July 24, 2018, the U.S. House of Representatives’ Committee on the Judiciary held a hearing entitled “Examining the Wayfair decision and its Ramifications for Consumers and Small Businesses.” The hearing was live-broadcast and was quite an interesting event.
Committee Chair Representative Robert Goodlatte issued opening remarks to the hearing, and also in a press release, in which he referenced that “The Court could have left resolution of this issue to Congress, to which the Commerce Clause grants ultimate authority to regulate interstate commerce.” The Chairman cited a sentence in the Court’s decision: that it was wrong to “ask Congress to address a false constitutional premise of this Court’s own creation” [i.e., the physical presence nexus standard], and stated his own view that “This reason is exactly backwards.”
Representative Goodlatte went on to discuss a list of his concerns about the states’ implementation of Wayfair, including:
- complexity for business compliance due to the 10,000 sales tax jurisdictions,
- costs of audits by multiple jurisdictions,
- the infancy of computer software suitable for small businesses,
- retroactive sales taxation remains a threat,
- the likelihood that a small business’s nexus would “ebb and flow over time” and thus create “a highly unstable compliance environment,”
- issues over how states will handle overseas sellers.
He added “We need to also consider the ripple effects of removing the physical-presence standard in other areas of state taxation and regulation” (which is also a huge question and concern by businesses regarding state and local income taxes and other business activities taxes).
And he referenced “Finally, what are the broader ramifications of the Wayfair decision for innovation? … What does it mean for the e-commerce world that this barrier to entry now looms large?”
The Chairman’s words may provide a clue in predicting an answer to the ultimate question of whether or not Congress will enact any type of legislation: “Once we hear from the witnesses, we will be in a better position to assess whether and how Congress should intervene, as is our prerogative, per the Wayfair decision.”
However, stating another viewpoint was Committee member Representative Jerrold Nadler, whose belief is that the federal government should not be involved and should leave sales tax requirements to the courts and the states. He referred to the fact that many large online sellers are already collecting sales tax. And Representative David Cicilline concurred, noting that the Wayfair decision will help the states’ revenue shortfalls. (This view seems to reflect one of the statements made by the majority in the syllabus to the Wayfair decision: “The physical presence rule of Bellas Hess and Quill is also an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions.”)
The Committee heard testimony from a number of invited witnesses, some advocating for Congressional action and some advocating against. Topics raised by proponents of Congress’s intervention included the costs and complexities of compliance and the burdens on small businesses, as well as some legal and philosophical arguments. Comments from witnesses who are against Congress’s involvement included the states’ view that their own processes can address the currently outstanding questions, and a retailers’ organization representative who said that compliance will not be that costly or complicated.
In addition to the eight witnesses who provided oral testimony in the hearing, there were several written briefs submitted for the Committee’s consideration. Oral testimony was provided by: Grover Norquist, President, Americans for Tax Reform; Chad White, Owner, Class-Tech Cars, Inc.; Larry Sinewitz, Executive Vice President, BrandsMart, representing the National Retail Federation; Bartlett Cleland, General Counsel, American Legislative Exchange Council; The Honorable Curt Bramble, Past President, National Conference of State Legislators; Andrew Moylan, Executive Vice President, National Taxpayers Union Foundation; and Andrew Pincus, Partner, Mayer Brown.
It will be interesting to see what if any impact the hearing’s discussion will have. As of the date of this article, there have been two proposed bills filed; see that discussion below.
* The Protecting Small Business from Burdensome Compliance Costs Act
On September 6, 2018, Representative Bob Gibbs of Ohio introduced “The Protecting Small Business from Burdensome Compliance Costs Act of 2018.” H.R. 6724. https://www.congress.gov/bill/115th-congress/house-bill/6724/text
The bill seeks to limit the authority of the states and their local jurisdictions by:
- Prohibiting the states from requiring sales tax collection or information by a remote seller for purchase transactions that occur prior to January 1, 2019;
- Restricting a remote seller’s sales tax remittance to a single in-state location;
- Limiting the collectable sales tax rate to a single uniform rate that does not exceed the combined rate applicable to in-state transactions;
- Prohibiting a state’s subdivisions from requiring remote sellers to collect a subdivision sales tax or to collect information incident to their sales.
* The Online Sales Simplicity and Small Business Relief Act of 2018
On September 14, 2018, Representative Jim Sensenbrenner of Wisconsin and a bipartisan group of cosponsors introduced “The Online Sales Simplicity and Small Business Relief Act of 2018.” H.R.6824. https://www.congress.gov/bill/115th-congress/house-bill/6824/text
Congressman Sensenbrenner’s press release says: “This bipartisan legislation reins in the taxation free-for-all created by the Supreme Court’s ruling in Wayfair. Online sellers need clarity and stability in the sales tax arena. Our bill will protect small businesses and internet entrepreneurs from excessive regulatory burdens.” The Congressman calls the bill “an orderly phase-in of compliance obligations.” His bill would also require any state that has received sales tax monies from remote vendors prior to January 1, 2019 to refund those taxes to the vendors, who in turn would need to refund the amounts to their customers. (This, of course, causes great angst among states for the revenue loss, and among businesses for the complicated refund process.) The bill’s provisions:
- Bar states from imposing sales tax collection duties on remote sellers for any sales that occurred prior to June 21, 2018, the date of the Wayfair decision;
- Prevent states from imposing sales tax collection duties prior to January 1, 2019;
- Provides a $10 million exemption for small business sellers until “30 days after the date on which the States develop and Congress approves an interstate compact, applicable to the State and sale, governing the imposition of tax collection duties on remote sellers.” The “sense of Congress” section of the bill describes that the intended interstate compact will contain provisions “that identifies a clearly defined substantial nexus between the remote seller and the taxing state, that simplifies registration, collection, remittance, auditing, and other compliance processes to the greatest extent possible in order to avoid undue burdens on interstate commerce, and that, due to such simplification, eliminates the need for the small business remote seller exemption.”
State legislators ask Congress not to enact federal requirements
The National Conference of State Legislators (NCSL) submitted a letter on September 18, 2018 to the Majority and Minority leaders of the U.S. House and Senate. http://www.ncsl.org/Portals/1/Documents/statefed/Wayfair_Decision091818.pdf In the letter the NCSL officers describe “On June 21, 2018 SCOTUS brought clarity to an issue that has been plaguing businesses and states for more than 20 years by ruling on favor or the states in South Dakota v. Wayfair … Now, less than three months after the ruling, proposals have emerged in Congress that would hinder state implementation efforts, preempt state authority, and create more problems that solutions.” The letter accuses opponents of Wayfair of using “fear mongering tactics to circulate rumors of chaos and uncertainty at the state level.” The letter pleads “As the states continue to ensure that remote sales tax implementation is done properly, we strongly urge you to respect these states’ efforts and not let legislation advance that would seek to hinder or halt implementation of the Wayfair decision by imposing federal requirements on remote sales tax collection.”
Many states have announced their requirements for applying the Wayfair ruling (see our companion article with details “States Announce Actions to Implement Wayfair Sales Tax Nexus Ruling”). While some of the Supreme Court’s comments in the decision and the specifics of the South Dakota law are being used as a model in some states, there are also significant differences among the states. Multistate sellers are thus left with another patchwork of rules to try to comply with. It’s hard to know whether Congress will insert itself with legislation that at least brings nationwide uniformity to some of the provisions.
Altus Group will be monitoring these and other developments and will continue our reporting.