With the U.S. Supreme Court agreeing to review its landmark Quill decision, congressional efforts to solve the online sales tax dilemma are on life support.
Online sales tax advocates are pushing Congress to quickly resolve the controversial decades-old debate over states taxing online sales, before the U.S. Supreme Court decides the issue in the next few months. However, Congress has failed to pass legislation dictating a national framework for states to collect and remit sales tax on online sales over the past 25 years since the Supreme Court invited it to do so in 1992.
“We’ve waited all these years, and I don’t think you can expect states to wait again,” Neal Osten of the National Conference of State Legislatures, which has lobbied for decades for online sales tax collection, told Tax Analysts. “If Congress wants to act before the Supreme Court decides, this is their chance.”
The question now is whether Congress can accomplish in a couple of months what it’s been unable to do for the past 25 years. Advocates said they are hopeful, but remain skeptical of Congress’s ability to act.
Moving the Needle
On January 12 the Supreme Court agreed to hear South Dakota v. Wayfair Inc., a case over the legality of a South Dakota law requiring out-of-state and internet retailers to collect sales tax on sales into the state. The law (S.B. 106) was passed in 2016 as a direct challenge to the Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota, which established the physical presence standard still adhered to today.
In its Quill decision, the Court issued a direct invitation to Congress to legislate on remote sales taxation.
“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,” the Quill opinion said. The Court also noted that their decision was “made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.”
Congressional proposals to allow states to impose sales tax collection requirements on remote sellers have been introduced almost every legislative session since 2003. None have passed.
Tired of waiting for Congress, states took matters into their own hands, establishing laws, regulations, and guidance in an attempt to capture the billions of dollars of uncollected sales taxes.
“We’ve been very patient over the years, and the time has come,” South Dakota Sen. Deb Peters (R), who championed S.B. 106, told Tax Analysts on January 17. “We’re done waiting. At some point you have to move the needle, and now, we’re moving the needle.”
Online sales tax advocates argue the Quill ruling is outdated and archaic, noting that the internet and online sales were largely unheard of in 1992. Critics of the tax maintain Quill is the law of the land and keeps states from placing the undue burden of tracking and collecting state sales tax on small businesses and retailers.
Oral arguments in the Wayfair case are expected to happen in April, and a decision in June, Peters said.
If the Supreme Court rules in South Dakota’s favor, effectively overturning the Quill decision, “I don’t see why states would want Congress to do anything,” Max Behlke of the NCSL said.
Pointing the Finger
Members of Congress and state experts have said they hope the Supreme Court’s agreement to take up the Wayfair case will propel legislation forward, but there’s been no action since the announcement.
“From what we’re hearing, now that the Supreme Court has granted cert, it has put some additional pressure on Congress to do something,” said Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, which has lobbied Congress for a federal solution to remote sales taxation.
There are two bills in Congress that would create a national framework for remote sales tax collection: the Marketplace Fairness Act (MFA; S. 976) and the Remote Transactions Parity Act (RTPA; H.R. 2193) in the House. Both were introduced in April 2016 and have yet to advance out of committee.
The farthest any remote sales tax bill has advanced in Congress is the 2013 version of the MFA, which passed the Senate on a 69-27 vote. However, it died at the end of session after languishing in the House.
Online sales tax advocates blame House Judiciary Committee Chair Bob Goodlatte, R-Va., saying he has blocked the bills from being considered in the committee. The bills would typically need the committee’s approval before advancing to the House floor.
“One man has held it up,” Osten said, referring to Goodlatte.
Goodlatte has previously supported a hybrid origin-sourcing proposal, which would allow states where the sale occurred — origin states — to collect sales tax on the remote sale, but at the tax rate determined by the state where the customer is located or the product or service is delivered — the destination state.
He unveiled a draft bill in August 2016 but has yet to file it formally.
In a January 12 statement, Goodlatte said he hoped the Supreme Court “will uphold the bright-line physical presence test, so that businesses will continue to be regulated only by their own state and local legislatures and not those of their competitors.” He said, “It is crucial that businesses have direct recourse to their regulators in order to maintain a check against overly aggressive state and local governments exporting burdensome regulations on businesses to which those governments have no accountability.”
Goodlatte concluded, “I remain committed to protecting citizens from the effects of such cross-border reach and ensuring accountability between the regulator and the regulated.”
His office deferred comment to the House Judiciary Committee, which did not respond to a request for comment before press time.
Rep. Kristi Noem, R-S.D., also accused Goodlatte of blocking her bill, the RTPA. She told local media outlets in South Dakota that she had the Trump administration’s support and may file a discharge petition to bring the bill straight to the House floor.
Noem’s office did not respond to multiple requests for comment before press time.
Even if it is Noem’s intention to introduce a discharge petition and bypass the House Judiciary Committee, it would be a hard road to turn the bill into law, said Gordon Gray, director of fiscal policy at the American Action Forum and a former policy adviser to Sen. Rob Portman, R-Ohio, in remarks to Tax Analysts.
“I haven’t seen anything that looks like you have a sufficient majority in the House, a supermajority in the Senate, and a willingness to sign by the executive branch,” he said. “That’s why we are where we are.”
Max D’Onofrio, spokesman for Sen. Michael B. Enzi, R-Wyo., one of the main sponsors of the MFA, said “there is still strong bipartisan support” for the bill. “Conversations are still ongoing between members in the House and Senate about the best way to move e-fairness legislation forward,” he added.
Sen. Heidi Heitkamp, D-N.D., a cosponsor of the MFA and North Dakota's tax commissioner who filed the action that became the Quill case, said January 12, "The Supreme Court’s decision to heed my call and revisit this case is welcome news."
Alan Friedman, the former Multistate Tax Commission general counsel who served as a special assistant attorney general for North Dakota in the Quill case, said, "In retrospect, I now am pretty sure Heidi Heitkamp and I were 25 years ahead of our time."
He continued, “Should the U.S. Supreme Court now overrule National Bellas Hess and Quill’s commerce clause holding, I will feel our efforts helped push this issue forward — and the heart attack that I had shortly after the ruling in Quill will be somewhat mended."
Peters echoed Friedman's sentiments. “I hope Congress acts before the decision because it will protect the retailers . . . and prevent a lot of patchwork," she said. "I don’t have a lot of hope that is going to happen, but I can still hope.”
Jad Chamseddine and Amy Hamilton contributed to this report.