Congress moves to restrict states’ ability to tax remote sales, again
- Sales and Use Tax
- Apr 17, 2019 | Gail Cole
Every so often, lawmakers on Capitol Hill try to prevent states from taxing remote sales. The most recent effort comes from Congressman Jim Sensenbrenner of Wisconsin, who introduced the Online Sales Simplicity and Small Business Relief Act of 2019 in late March.
To provide context: States only recently gained the privilege to impose a tax on sales by certain out-of-state businesses.
States were long prohibited from imposing a sales tax collection obligation on businesses with no physical presence in a state. Their attempts to overturn this physical presence rule on Capitol Hill came to naught: Although many lawmakers supported the idea — so much so that the Senate passed the Marketplace Fairness Act (MFA) of 2013 — it had powerful opponents. Among them was former Representative Bob Goodlatte, Chair of the House Judiciary Committee, who held the MFA and similar bills from the floor.
Blocked in Congress, states switched tactics. Several, including South Dakota, challenged the physical presence rule in court. Their goal was to get a case before the Supreme Court of the United States, which had twice upheld the physical presence rule (National Bellas Hess v. Department of Revenue, 1967, and Quill Corp. v. North Dakota, 1992).
Sensenbrenner tried to get ahead of a potential court ruling with the No Regulation Without Representation Acts of 2016 and 2017. Both sought to codify the physical presence rule upheld by the Supreme Court in Quill. Neither gained any traction.
In the end, South Dakota’s challenge to the physical presence rule was successful. The Supreme Court found the physical presence rule to be “unsound and incorrect” in South Dakota v. Wayfair, Inc. (June 21, 2018). While physical presence in a state still triggers a sales tax collection obligation, Wayfair authorizes states to base a tax collection obligation on economic activity alone, or economic nexus.
Now, instead of trying to prevent states from being able to tax remote sales, Sensenbrenner and several other lawmakers on the Hill are reacting to Wayfair. At least three bills seeking to limit how states can tax remote sales were introduced between June 21, 2018 and the end of the year, including one backed by lawmakers from New Hampshire (a sales tax-free state). These were recently joined by Sensenbrenner’s Online Sales Simplicity and Small Business Relief Act of 2019, H.R. 1933.
The bill seeks to restrict how states tax sales by out-of-state businesses. According to a sponsor press release, it would prevent states from requiring remote online sellers to collect sales tax retroactively on transactions made before January 1, 2019. Additionally, it would “exempt small business sellers who gross less than $10 million in annual sales from collection duties until states produce a compact, approved by Congress, to simplify collection to the point where no small business exemption is necessary.” A multistate compact already exists in the form of the Streamlined Sales and Use Tax Agreement (SST), but participation is voluntary.
Filing through the SST can simplify remote sales tax compliance. Learn more.
Congress has had decades to deal with this issue, to no avail. It remains to be seen whether the most recent attempts will be successful.
Meanwhile, states are moving ahead with economic nexus laws that require out-of-state sellers doing a certain amount of business in the state to collect and remit sales tax. To date, 30 states currently enforce economic nexus, another nine will enforce it in the coming months, and most remaining states with a general sales tax have economic nexus legislation pending.