State and federal lawmakers rally in response to Supreme Court sales tax ruling
A bill to regulate the way states tax interstate commerce was introduced in the United States Senate just one week after the Supreme Court of the United States ruled physical presence is no longer a prerequisite for imposing a tax collection obligation on interstate sellers. The measure (S. 3180) was introduced by Senator Jon Tester of Montana, one of the five states with no general sales tax. The first senators to sign on as cosponsors are from two other non-sales-tax states: New Hampshire and Oregon.
South Dakota v. Wayfair, Inc. recap
On June 21, 2018, in South Dakota v. Wayfair, Inc. (Wayfair), the Supreme Court overruled the physical presence rule it upheld more than 25 years earlier in Quill Corp. v. North Dakota (Quill). Although unpopular among many states, Quill was the litmus test used by states to determine which businesses a state could tax and which it could not: Sales by businesses with a physical presence in a state could be taxed by that state, while sales by businesses without a physical presence in a state could not be taxed by that state.
In Wayfair, the court determined Quill’s physical presence rule was “unsound and incorrect.” Furthermore, it found the “economic and virtual contacts” Wayfair et al. had with South Dakota to be a “clearly sufficient” basis for establishing nexus (the connection that triggers a tax collection obligation).
The case was remanded to state court “for further proceedings not inconsistent with this opinion,” so South Dakota can’t enforce its law at present. Yet the Wayfair decision has given other states a path to tax remote sales. Close to 20 states have South-Dakota-style economic nexus bills on the books, and they’re eager to enforce them. Indeed, enforcement already began July 1, 2018, in Vermont.
Stop taxing our potential
Harkening back to Quill, the Stop Taxing Our Potential Act of 2018 (STOP) would prohibit states from imposing a tax collection obligation on any business unless it had a physical presence in the state. The act defines “physical presence” as:
- Having one or more employees, agents, or independent contractors in the state who provide on-site design, installation or repair services
- Having one or more employees, exclusive agents, or exclusive independent contractors who assist in establishing or maintaining a market in the state
- Leasing or owning tangible personal property of more than de minimis (minor) value in the state (other than computer software)
- Maintaining a commercial or legal domicile in the state
- Maintaining an office that regularly employs three or more workers in the state
- Owning, holding a leasehold interest in, or maintaining real property in the state (e.g., distribution center, retail store)
The measure expressly prohibits taxing out-of-state business with certain other connections to the state, including:
- Business activities directly relating to a person’s potential or actual purchase of goods or services within a state if the final decision to purchase is made outside the state
- Entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the state, whether by an internet link or platform, website, or otherwise (click-through nexus)
- Furnishing information to customers or affiliates in the state from a point outside the state
- Having physical presence for less than 15 days in a taxable year
- Internet advertising services provided by in-state residents which aren’t exclusively directed towards, or do not exclusively solicit, in-state customers
- Ownership by a person outside the state of an interest in a limited liability company or similar entity organized or with a physical presence in the state (affiliate nexus)
- Product placement or setup relating to delivery
The measure would also impose certain restrictions on state taxation of marketplace sales. And federal courts — not state courts — would be responsible for determining enforcement.
If prior congressional efforts to legislate the taxation of remote sales are indicative of the future, it could be months or years before there’s any real action on S. 3180. In the meantime, at least one state is moving ahead with battle plans of its own.
New Hampshire: Prepare to undertake “the fight of your life.”
New Hampshire Governor Chris Sununu responded to the Wayfair ruling with strong words for out-of-state taxing jurisdictions and authorities: “If you try to come into our state and force our businesses to collect a sales tax in a manner that violates our laws or the United States Constitution, you will be in for the fight of your life. Live free or die is not just a slogan on a license plate. It is the very essence of who we are. Our State Constitution says that ‘the people of this State have the sole and exclusive right of governing themselves as a free, sovereign and independent State.’ … Working together, we will do everything in our power to prevent other States from violating this principle."
The governor is working with the state attorney general and legislative leaders to craft legislation “to protect our businesses from improper attempts by other states to force our businesses to collect sales and use taxes.” They intend to “erect every possible and constitutionally permissible legal and procedural hurdle,” including the following:
- Out-of-state taxing authorities seeking to audit or impose tax collections on New Hampshire businesses will have to notify the New Hampshire Department of Justice of their plans
- The N.H. Department of Justice will have to determine whether the out-of-state taxing authority’s statutes provide “certain protections and meet strict requirements,” including:
- A safe harbor for a certain amount of sales
- A prohibition against retroactive enforcement
- A safe harbor for small businesses
- Proof that its laws will not impose an unconstitutional burden on New Hampshire businesses
- The N.H. Department of Justice will be empowered to file an expedited suit to block any attempt to impose tax collection obligations undertaken in violation of this new law
Additional details will be forthcoming. The governor may convene a special session of the legislature to consider this matter.
Stay up-to-date on the fallout from South Dakota v. Wayfair, Inc. here.
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