Remote sales tax legislation cut from spending bill
Congressional efforts to enact remote sales tax legislation before the Supreme Court of the United States rules on the issue crumbled Wednesday night when the omnibus spending bill moved forward without inclusion of the Remote Transactions Parity Act (RTPA). The RTPA would authorize states with simplified reporting requirements to tax certain remote sales.
Bill sponsor South Dakota Representative Kristi Noem intensified her efforts to pass the RTPA after the Supreme Court announced it would hear South Dakota v. Wayfair, Inc. The case calls the court to reconsider the physical presence standard it upheld in Quill Corp. v. North Dakota — that a state cannot tax a business unless it has a physical presence in the state.
Quill’s physical presence limitation has long prevented states from taxing out-of-state vendors. When the decision was made in 1992, it primarily impacted phone and catalog sellers like the Quill Corporation. Nowadays, it also keeps the long arm of the tax man from many internet sellers. That could change if the Supreme Court repeals or amends the physical presence standard, as South Dakota is asking it to do.
Economic nexus challenges physical presence nexus
South Dakota’s economic nexus law (SB 106) directly challenges the physical presence standard by maintaining that nexus — the connection between a state and a business that triggers a sales tax collection obligation — can be established by an out-of-state business’s economic activity in the state. Under SB 106, a remote business has nexus if it makes more than $100,000 from taxable sales in South Dakota or has at least 200 separate taxable sales transactions delivered into the state. Read more about South Dakota’s challenge to Quill.
Congress vs. Supreme Court
The issue could be settled by Congress rather than the Supreme Court. The court itself recognized that in the Quill opinion: “Congress may be better qualified to resolve” the underlying issue.
It looked like Congress would handle it in the spring of 2013, when the Senate passed the Marketplace Fairness Act (MFA) of 2013. But all versions of the MFA and the similar RTPA were then held in the House Judiciary Committee and kept from the floor of the House. The issue was periodically broached but received little attention in Congress until January, when the Supreme Court agreed to hear South Dakota v. Wayfair, Inc.
The involvement of the Supreme Court has motivated some members of Congress to act, perhaps because in 2015, Justice Anthony Kennedy called Quill “questionable even when decided.” He said that “it should be left in place only if a powerful showing can be made that its rationale is still correct.” In other words, there’s a good chance the court will kill Quill — or at least weaken it.
The Congressional divide
Yet while South Dakota v. Wayfair, Inc. may have renewed Congress’s interest in remote sales tax, it hasn’t helped close the divide between those who think states should have the authority to tax at least some remote sales, and those who want Quill’s physical presence standard to stand.
As Rep. Noem pushed to include the RTPA in the omnibus spending bill, Senator Ted Cruz worked to ensure that it was kept out of it. He believes it would be “a serious, serious mistake” to allow states to tax internet sales by out-of-state sellers. Because of his efforts or despite them, he got what he wanted. But we may not have seen the last of the RTPA in 2018. Noem said she’d use “whatever tool is available” to bring the measure to the floor of the House if it was blocked from the spending bill, which it has been.
Although the omnibus spending bill doesn’t include the RTPA, it does touch on a state's right to tax out-of-state vendors. On page 1934 of the 2,232-page bill is a late-addition provision that prevents states from imposing a tax collection obligation on wireless telecommunications vendors that don’t have a physical presence in the state.
The provision reads: “A State, or a local jurisdiction of a State, may not require a person who is neither a resident of such State or local jurisdiction nor an entity having its principal place of business in such State or local jurisdiction to collect from, or remit on behalf of, any other person a State or local tax, fee, or surcharge imposed on a purchaser or user with respect to the purchase or use of any wireless telecommunications service within the State unless the collection or remittance is in connection with a financial transaction.”
That’s an interesting addition. But Congress is unlikely to address a state’s right to tax sales by out-of-state vendors before the Supreme Court issues a decision on South Dakota v. Wayfair, Inc., which is expected in late June. It has a plate full of other matters.
Early Friday morning, a few hours after tweeting that he might veto the omnibus spending bill, President Trump signed it into law.
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