On July 24, the House Judiciary Committee held a hearing to examine possible effects of the recent Supreme Court decision in South Dakota v. Wayfair, Inc., et al. and discuss what actions, if any, Congress should take in response to the ruling. The Court’s 5-4 ruling overturning the 1992 Quill Corp. v. North Dakota decision clears a path for states to require remote sellers to collect sales taxes by removing the requirement that the retailer must have a physical presence in the state in order to be subject to state sales tax collection laws.
The decision is a major step forward in allowing states to structure sales tax collection requirements in a manner that reflects a modern economy, but it leaves open the question of exactly how laws requiring remote sellers to collect and remit sales taxes must be constructed in order to withstand future legal challenges. The majority opinion signaled that certain elements of South Dakota’s law, such as its prospective (rather than retroactive) application, provisions to simplify collection associated with its membership in the Streamlined Sales and Use Tax Agreement (such as a limited number of separate tax rates), and its application only to sellers who met a certain transaction threshold, would likely protect the law from a challenge under the Commerce Clause because they “appear designed to prevent discrimination against or undue burdens upon interstate commerce.” However, the opinion does not explicitly spell out what criteria must be met for a similar state law to pass Constitutional muster.
Several witnesses at the hearing cited the lack of definitive guidance in the ruling as a reason for Congress to intervene to set clear parameters for states to follow, citing concerns about potential retroactive application of collection requirements, compliance burdens on small sellers, and possible expansion into other areas of taxation, such as corporate income taxes. Committee Chairman Bob Goodlatte said in his opening statement, “The Court’s close and incomplete decision in Wayfair has the potential to unleash chaos for consumers and remote sellers, particularly small business sellers,” and suggested that more time is needed to resolve both technical and substantive questions. Grover Norquist, representing Americans for Tax Reform; Bartlett Cleland, representing the American Legislative Exchange Council (ALEC); and Andrew Moylan, representing the National Taxpayers Union, submitted testimony advocating for Congress to impose a moratorium on state implementing legislation until Congress resolves these issues. Several speakers suggested possible limits for Congress to impose on remote collections; for example, ALEC’s statement encouraged Congress to reinstate the physical presence standard, or at a minimum impose requirements for states to streamline their collection systems by setting single rates for remote sales and developing uniform definitions of taxable and exempt products; ALEC also advocated for Congress to require states and localities to shoulder all compliance costs for merchants.
Utah State Senator Curtis Bramble, representing the National Conference of State Legislatures, contended that Congress should take no action and instead allow the states to proceed with implementation, arguing that the Court’s highlighting of key provisions of South Dakota’s law provides states with a template to follow in passing their own laws. His testimony includes a list of suggested principles for states to follow, including issuing clear guidance to businesses with as much advance notice as possible, simplifying the registration process for sellers, and providing a depository of materials needed for sellers to comply with state laws.
It is difficult to predict whether Congress will act to impose parameters on state tax collection laws. Congress wrestled with the issue of remote sales tax collection for years, and legislation passed the Senate in 2013, but was unsuccessful in the House. It is likely that Virginia will take action to implement the ruling in the upcoming General Assembly session.
A recording of the hearing is available on the House Judiciary Committee’s website.
VACo Contact: Katie Boyle