by Kelly Phillips Erb
March 19, 2018
Congress was back at it this week, trying to reach an agreement on spending. Both sides were scrambling to make a deal with the hope that there will be a vote in the House on Wednesday. If there’s no bill in place by midnight Friday, we’ll see another government shutdown.
Sound familiar? It should. But while the will-they-or-won’t-they isn’t new, there may be a twist: the rush to regulate online sales tax.
No, you didn’t accidentally click through to a different article. There’s a connection.
In 2017, Rep. Kristi Noem (R-SD) introduced H. R. 2193, Remote Transactions Parity Act. The relatively short bill has a big goal: To grant States authority to enforce State and local sales and use tax laws on remote transactions, and for other purposes. Or put another way, the bill would allow states to require retailers located outside of their borders (online retailers) to collect sales and use taxes subject to certain restrictions.
Now, members of the House are pushing to have Noem’s bill attached to the spending bill. And there is definitely some weight behind the push. As it stands, Noem’s bill currently has 50 co-sponsors, with roughly equal numbers of Democrats and Republicans. You can check out the list here.
An email to Rep. Noem’s office regarding any movement on the bill was not immediately returned.
And the bill isn’t all on its own. A companion bill, S.976, Marketplace Fairness Act of 2017, currently sits in the Senate. But until recently, neither of the bills had made it out of committee. So why push now?
A changing tide. In 2016, Colorado successfully passed a law requiring retailers to report more information about sales. In 2017, Amazon began collecting sales tax in all 45 states with a sales tax (Amazon doesn’t collect sales tax in Alaska, Delaware, Montana, New Hampshire, and Oregon since those states do not have a state sales tax). And in 2018, the Supreme Court agreed to hear South Dakota v. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. on the question of whether the current sales-tax-only, physical-presence requirement should stand? Or, in simple terms, should the Supreme Court kill Quill?
Quill refers to Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992), a Supreme Court case which examined the differences between the “minimum contacts” nexus required by the Due Process Clause and the “substantial nexus” required by the Commerce Clause. Nexus is a legal term for a connection; it’s important in the tax world because, under the Constitution, states must establish a connection between a taxpayer and the state in order to impose taxes. The Court ruled that only those companies with a physical presence inside a state can be required to collect sales tax, “continuing value of a bright line rule in this area.” With respect to brick and mortar stores, that’s pretty easy: Are you physically located in the state or not?
(You can read Quill here.)
But the advent and growth of internet sales have complicated the issue. Every state that imposes a state sales tax also imposes a state use tax. A use tax is the taxpayer’s equivalent of the sales tax. It’s imposed on goods that would otherwise be taxable inside a state for “use, storage, or consumption” when sales tax has not been paid. In other words, if you buy something that isn’t taxed in a state which does impose a sales tax, you owe the tax anyway. So if you buy something over the internet from a retailer who isn’t required to collect the sales tax because of those Quillrequirements, you may still owe the tax to your state. Instead of paying the tax to the retailer (as you would in a physical store), it becomes your responsibility to figure and remit the tax to the proper authorities.
Relying on individual taxpayers to calculate sales taxes on their online purchase is not efficient. As states become increasingly aware of the amount of revenue they’re losing, they are seeking better ways to collect. Increasingly, that means that they are demanding that retailers be responsible for figuring and remitting the tax. Sometimes, as in Colorado, they’ve been successful. In other cases, as in Massachusetts, the reach has been deemed too far.
The lack of a consistent approach across the states has raised the question of whether Quill deserves a second look. The Supreme Court has agreed to hear the question, and oral arguments in Wayfair are scheduled to begin, fittingly enough, on Tax Day, April 17, 2018.
(You can view the docket here.)
Will Wayfair kill Quill? Most legal observers generally agree that Quill won’t stand in its entirety. But what’s the real consequence of such a ruling? The fear from some conservatives is that overturning Quill could open the floodgates for states to pass a series of new tax laws and regulations that could make sales and use taxes even more confusing than they are now. The solution to that potential problem? One way to get ahead of the states and the Court (and Quill) would be for Congress to pass legislation that resolves the matter. After all, the Constitutions grants Congress the power to regulate interstate commerce – that’s found in the Commerce Clause (cited, of course, to that effect in Quill).
But it can be tough to gather consensus on what that legislation should look like unless, perhaps, that language was attached to something more time sensitive – like the omnibus. With a nod to Justice Kennedy in Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy J., concurring), it may well be that some in Congress have determined that “it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”
(Author’s note: As of the evening of March 19, Noem’s sales tax provision was not expected to be included in the final bill, but the text was not available for review. I will update you as soon as I know more.)