Will Congress restrict states’ right to tax remote sales?

Some members of Congress think Congress should limit the way states can tax sales by sellers with no physical presence in the state. To that end, Wisconsin Representative Jim Sensenbrenner has introduced the Online Sales Simplicity and Small Business Relief Act. In a similar vein, Ohio Representative Bob Gibbs has introduced the Protecting Small Business from Burdensome Compliance Costs Act of 2018.

Supreme Court grants states right to tax remote sales

States only recently won the right to tax remote sales. For decades, businesses had to have a physical presence in a state for the state to tax their sales. On June 21, 2018, the Supreme Court of the United States found this physical presence rule to be “unsound and incorrect” and overruled it in South Dakota v. Wayfair, Inc. States now have the authority to tax sales by businesses with no physical presence in the state.

The case grew out of a challenge to South Dakota’s economic nexus law, which imposes a tax collection obligation on businesses with a certain amount of economic activity but no physical presence in the state. South Dakota’s law provides an exception for businesses with less than $100,000 in sales or fewer than 200 separate transactions in the state.

While the physical presence rule was unpopular in many states, it provided a good deal of clarity. Certainly, there are numerous ways of defining a physical presence; and as untaxed internet sales grew and state sales tax revenue correspondingly dropped, states looked for work-arounds. Still, there was a bright-line test.

In removing the physical presence constraint, the Supreme Court offered few guidelines to replace it. However, it did highlight three aspects of South Dakota’s tax system “that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:

• There is an exception for small sellers (a “safe harbor”)
• A sales tax collection obligation cannot be applied retroactively to remote sellers
• As a member of the Streamlined Sales and Use Tax Agreement (SSUTA), South Dakota has taken steps to simplify sales tax compliance and reduce its burden and cost

Approximately 25 states now have an economic nexus law, and most resemble South Dakota’s. They usually, though not always, provide a small seller exception and prohibit retroactive enforcement. Sixteen of the states are members of the SSUTA.

Nonetheless, a state doesn’t have to be a member of the SSUTA to require a remote seller to collect sales tax; nor is there a mandate for prospective enforcement or a safe harbor for small sellers. 

Online Sales Simplicity and Small Business Relief Act

According to Rep. Sensenbrenner, “Online sellers need clarity and stability in the sales tax arena.” His Online Sales Simplicity and Small Business Relief Act seeks to “protect small businesses and internet entrepreneurs from excessive regulatory burdens.” To that end, it would:

• Ban states from imposing sales tax collection duties on remote sellers for any sale that occurred prior to June 21, 2018
• Prevent states from imposing sales tax collection duties prior to January 1, 2019

His measure defines “physical presence” as being an individual physically in the state (or having employees in the state), leasing or owning tangible personal property (other than digital or alphanumeric data) or real property in the state, and using the services of an agent, including an employee, to establish or maintain a market in the state — provided such agent doesn’t perform business services in the state for any other person during the taxable year.

Sensenbrenner’s bill provides an exception for businesses in the state for less than 15 days in a taxable year, “or if the person’s physical presence in the state was solely for the purpose of conducting limited or transient business activity.”

In addition, it would provide an exception for remote sellers with gross annual receipts in the United States of $10 million or less during the preceding calendar year.

Protect Small Business from Burdensome Compliance Costs Act

Rep. Gibbs says there should be “guidelines for states seeking to expand their sales tax to online sales for which no nexus exists.” His Protecting Small Business from Burdensome Compliance Costs Act proposes the following restrictions:

• States cannot retroactively collect sales tax for previous interstate sales where no nexus existed
• States cannot require collection and remittance of sales tax by out-of-state sellers before January 1, 2019
• States seeking to collect sales tax from out-of-state vendors with no physical presence must:
  • Provide a statewide, uniform tax rate that cannot be higher than the highest combined rate of all state and local taxes 
  • Permit out-of-state vendors to remit sales taxes to one location
  • Provide a statewide uniform provision for what is taxable

Local jurisdictions within a state would not be permitted to impose any tax or reporting obligation on remote sellers. States, however, could require a vendor to provide the ZIP code areas of their customers, along with the aggregate amount of the taxes or fees they collect in a particular ZIP code area.

Gibbs says his bill “balances the rights of states to collect tax on online sales while protecting consumers and small businesses from facing an undue burden.” Yet Gibbs is a bit late to the table. Four states are already enforcing economic nexus. Economic nexus policies will be in effect in a total of 15 states come October 1, and in more states in the months that follow (states with economic nexus).

Scott Peterson, Vice President of U.S. Tax Policy and Government Relations at Avalara, says Gibbs’ measure is unlikely to pass. Yet it does highlight the complexity of sales and use tax compliance: Vendors that collect in multiple states must contend with a plethora of different rates, rules, and regulations. That’s unlikely to change, at least in the foreseeable future.

Fortunately, sales tax automation software like Avalara AvaTax makes sales tax compliance much more manageable.