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Will Congress take on remote sales tax in 2019?


Congress

Could Congress tackle remote sales tax in 2019? It’s toyed with the idea for decades without ever agreeing on a remote sales tax law — and may have missed an opportunity not easily regained.

In the past 50 years, the Supreme Court of the United States has issued three formative rulings on whether and to what degree states should be allowed to tax remote sales. In the first two, it invited Congress to take on the issue. It politely withdrew that invitation in the third, when it granted states the authority to tax remote sales.

New leadership in Congress may bring a fresh perspective to this issue — the tone of the powerful House Judiciary Committee seems to have shifted already. But with every month that passes since the last Supreme Court ruling (June 2018), the opportunity for intervention seems to recede. Approximately 30 states are already taxing remote sales, and they’re loathe to give up that revenue.

Understanding how we got to this point may provide some insight into what to expect in 2019 and beyond. Read on for a remote sales tax timeline.

1967: Supreme Court adopts physical presence rule, invites Congress to intervene

In National Bellas Hess, Inc. v. Department of Revenue of Ill., the Supreme Court of the United States rules that a business must have a physical connection with a state for the state to tax that business’s sales. Yet the court also invites Congress to the table: “This is a domain where Congress alone has the power of regulation and control.”

1967–1992: Congress misses out on opportunities to regulate remote sales tax

Congress heeds the call, sort of. It introduces eight pieces of legislation seeking to “overrule” the Bellas Hess rule (see Quill Corp. v. North Dakota, Footnote 11). None of them become law.

1992: Supreme Court upholds physical presence rule, invites Congress to intervene

The Supreme Court revisits remote sales tax in Quill Corp. v. North Dakota, which upholds the 1967 decision: “The Bellas Hess rule [i.e., physical presence] remains good law.” Yet as before, it invites Congress to intercede: “Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”

1995: Birth of modern ecommerce

Amazon sells its first book and doesn’t look back.

2001–2018: Congress misses out on opportunities to regulate remote sales tax

States redouble efforts to tax remote sales as untaxed internet sales start taking a noticeable bite out of their budgets. Opposition to remote sales tax also grows: Non-sales tax states want to protect in-state businesses from sales tax collection obligations in other states; ecommerce businesses argue remote sales tax compliance would be prohibitively complex and costly.

More than 20 bills dealing with remote sales tax are introduced between 2001 and 2018. These include, but aren’t limited to:

  • Internet Tax Moratorium and Equity Act (2001)
  • Sales Tax Fairness and Simplification Act (2005–2006)
  • Main Street Fairness Act (2011)
  • Marketplace Fairness Act of 2013 (this passes the U.S. Senate but never got through the House Judiciary Committee)
  • Remote Transactions Parity Act (2015, 2017)
  • No Regulation Without Representation Act (2016, 2017)
  • Online Sales Simplicity and Small Business Relief Act of 2018
  • No Retroactive Online Taxation Act of 2018

Some of the above would expand state taxing authority; others would restrict it. A closer look at the happenings in the House Judiciary Committee helps illustrate the dichotomy.

2013–2018: Bob Goodlatte, the House Judiciary Committee, and more missed opportunities

In 2013, the Senate overwhelmingly passes the Marketplace Fairness Act of 2013, which would force states to adopt sales tax simplification measures before taxing remote sales. It’s killed by the House Judiciary Committee (HJC).

Representative Bob Goodlatte, then Chairman of the HJC, opposes “regulation without representation.” Under his leadership the HJC keeps all bills seeking to expand state tax authority from the floor. His favored solution, the Online Sales Simplification Act, lacks the support needed to make it out of draft form.

Goodlatte is often said to be a “major reason why the remote seller bills were blocked,” though he insists remote sales tax is a matter for Congress. Even the threat of another Supreme Court ruling on remote sales tax does not spur the HJC to act. By not dealing with the issue of remote sales tax, Congress misses a chance to influence state sales tax administration.

2018: Supreme Court removes physical presence barrier, disinvites Congress

To the surprise of many, the Supreme Court agrees to hear a case regarding South Dakota’s economic nexus law, which challenges Quill’s physical presence rule by basing a remote sales tax collection obligation on economic activity alone (economic nexus).

In South Dakota v. Wayfair, Inc., the court overrules the physical presence rule, calling it “unsound and incorrect.” It also withdraws its prior invitations to Congress: “It is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.” 

Furthermore, it becomes more difficult for Congress to intervene as more states benefit from the Wayfair ruling — and more than 30 adopt states remote seller sales tax policies within six months of the ruling. Most base a sales tax collection obligation on economic activity rather than physical presence, but they’re all unique. Thus, they complicate sales tax compliance for businesses.

The onslaught of remote sales tax policies renews calls for congressional intervention. As before, the future of federal remote sales tax legislation depends on the powerful House Judiciary Committee.

2019: Jerry Nadler, the House Judiciary Committee, and the unknown

In 2018, former HJC Chairman Goodlatte lamented the Wayfair ruling, calling it “a nightmare” with “the potential to unleash chaos for consumers and remote sellers.” But Goodlatte has retired, and his successor Representative Jerrold (Jerry) Nadler holds a different view.

In a July 2018 hearing on the Wayfair decision, Nadler said, “The federal government should not intrude on state tax policy. Although Congress has a constitutional responsibility to ensure the orderly function of interstate commerce, it is also obliged to respect the sovereignty of the states to determine their own sales and use tax policies.”

The committee’s new ranking member, Representative Doug Collins, also takes a more moderate approach than did Goodlatte. Though he believes Congress should address the issue of remote sales tax, he has said that “defaulting to a physical-presence standard similar to the one adopted by the Quill court ignores the reality of a modern economy” (hat tip to Bloomberg Tax).

It remains to be seen whether the HJC will take up the issue of remote sales tax in 2019. If it does, the outcome is far from certain. Though Chairman Nadler supports states’ right to determine their own sales tax policies, he’s also expressed confidence that states will strive to “minimize administrative burdens and uncertainty for remote sellers.” This is easier said than done.

Learn more about state remote sales tax laws.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Gail Cole
Avalara Author Gail Cole
Gail Cole began researching and writing about sales tax for Avalara in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.