The stunning election of Donald J. Trump on November 8 has put Republicans in control of both chambers of Congress and the White House. There’s now a greater chance than ever of federal tax reform. While in theory federal tax policy doesn’t directly impact state tax policy, in practice it often does: every time Congress changes taxes, states evaluate the impact on their own revenue streams and adjust policies accordingly.
Is change at the federal level likely? Much could be accomplished during the next two years, when Republicans control both the legislative and executive branches of government. Yet change takes time, and many of the promises Trump made on the campaign trail cannot be done with the stroke of the presidential pen alone. His administration will have to work with Congress on many issues, including taxes, and there are differences between President-elect Trump’s agenda and House Republicans’ “blueprint” for tax reform (check out KPMG’s comparison of the two). However, both favor lowering and consolidating individual income tax rates, decreasing corporate rates, and adjusting deductions.
Impact on state taxes: online sales tax
One possible side-effect of such reforms could be federal online sales tax legislation. If the domino effect of Congressional policies leads to a reduction in states’ tax revenue, states could be given a bone: the right to tax remote sales. Under current law, states are prohibited from imposing a tax collection obligation on any business lacking a substantial nexus — usually defined as a physical presence — in the state. Three bills that have long been awaiting consideration on Capitol Hill (the Marketplace Fairness Act, the Remote Transactions Parity Act, and the Online Sales Simplification Act) would enable states with simplified tax administration to tax certain remote retailers. A fourth would prohibit the taxation of remote sales.
Will the new administration support an online sales tax? There’s no love lost between the president-elect and Jeff Bezos, founder and CEO of Amazon.com (the company synonymous with online sales). During the campaign, Trump told Fox News that “Amazon is getting away with murder, tax-wise.” However, it’s difficult to discern the president-elect’s true stance — his comments about Amazon seem to have been more related to his disapproval of The Washington Post, which is also owned by Mr. Bezos.
Last February, Trump tweeted that Amazon would have problems if he were elected: “Believe me, if I become president, oh do they have problems. They’re going to have such problems.” In a later tweet, Trump talked of the “massive taxes” Amazon should be paying, saying that “it’s a very unfair playing field.” The need for a level playing field has been a core tenet of the pro-online sales tax camp, which argues that non-collecting internet sellers have an unfair advantage over the Main Street businesses that must collect tax. Requiring out-of-state retailers to charge sales tax would remove that advantage.
The explosive growth of Amazon and other ecommerce companies has certainly impacted brick-and-mortar stores. Ecommerce sales are steadily rising — a trend that shows every indication of continuing — and state sales tax revenues are dropping. According to the National Conference of State Legislatures, “states lost an estimated $23.3 billion in 2012 in uncollected taxes to online and catalog purchases. … The losses are becoming more pronounced as a greater number of consumers opt to shop online.”
Trump the businessman has said he’s “smart” to pay as few taxes as possible, but let’s assume Trump the president does believe that states should be allowed to tax sales by remote vendors. As Governor, Vice President-elect Mike Pence also voiced support of the Marketplace Fairness Act: “I don’t think Congress should be in the business of picking winners and losers. Inaction by Congress today results in a system today that does pick winners and losers.”
Even if both Trump and Pence favor letting states tax remote retailers, would it matter? President Obama has voiced his support for the online sales tax since at least 2013, and it’s gone nowhere. After all, tax laws cannot be changed without Congress.
Internet sales tax and the Supreme Court
But perhaps there is another way. States, impatient with federal inaction, are taking the matter of internet sales tax into their own hands. Many have broadened the definition of nexus to include sales by certain out-of-state sellers. Others have opted for use tax notification requirements to facilitate collections of consumer use tax. More recent efforts include economic nexus policies, whereby a state bases its need to tax remote sales on its reliance on sales tax revenue.
These policies are often challenged by businesses and fiercely defended by states. In the last year, there has been a concerted effort by states to gain the opportunity to overturn Quill Corp. v. North Dakota,” the 1992 Supreme Court case upholding the precedent that remote vendors lacking a physical presence in a state could not be taxed. Alabama, Colorado, and South Dakota all are engaged in legal battles over their remote sales tax policies, and all hope their cases will be heard by the Supreme Court of the United States. Florida, too, is arguing a case that could end up before the Supreme Court. And a recent ruling by the Ohio Supreme Court (that the state may impose its commercial activity tax on businesses lacking a physical presence) is likely to be challenged.
How the Supreme Court would rule is unknown. Justice Anthony Kennedy has written that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.” Other justices have remained silent on the issue, and the ninth seat has yet to be filled in the wake of Justice Antonin Scalia’s death.
The Supreme Court made clear in 1992 that Congress has the power to resolve this issue, and “may be better qualified to resolve” it. Thus far, Congress has failed to do so, and yet another year appears to be coming a close without resolution: Congress is leaning toward a clean continuing resolution, and the Trump transition team is busy with other matters.
The end of 2016 therefore raises familiar questions: will federal lawmakers take up online sales tax next year? Will the Supreme Court of the United States?
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