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Life after Wayfair: Congress Steps In

We’re not ashamed to admit we’re a bit nerdy when it comes to tax matters. We always love talking/reading/studying (… eating/sleeping/living) tax and tax-related things. But even we think it’s been more exciting than usual in the world of state tax this summer!

The Supreme Court handed down its opinion in South Dakota v. Wayfair on June 21, 2018. You can see our initial attempt to summarize the opinion here. Immediately after that, there was a flurry of activity as each state tried to address implementation of the “new” regime that would allow them to tax out of state vendors of tangible personal property into their states. Our initial look at Washington’s and California’s responses is here. Since then, lawmakers in dozens of states have proposed or introduced versions of the South Dakota law that attempt to tax remote sellers.

The language of the Wayfair opinion raised all kinds of issues; ranging from what is the appropriate standard to when will retroactive tax legislation been permissible. There were also practical considerations involving when a marketplace facilitator will need to force sales tax collection and compliance. We’ve gotten a lot of questions this summer about what is really meant by minimum contacts.

One of the key points of the Quill opinion, which Wayfair overturned, was a suggestion that Congress act to address remote sales in an evolving economy. The Supreme Court in Wayfair lamented the fact that the US Congress had not acted in the 26 years since it decided Quill. The Court felt that Congress needed to act. Failing that, the Court decided that it could expand its understanding of what the Commerce Clause allowed states to tax by holding that Quill had been incorrectly decided.

On Friday, September 14, 2018, a bipartisan group of Representatives (Jim Sensenbrenner (R – Wisconsin), Anna Eshoo (D – California), Jeff Duncan (R – South Carolina), and Zoe Lofgren (D – California)) introduced the “Online Sales Simplicity and Small Business Relief Act.” (Interestingly, only Rep. Eshoo put a link to their statement on her congressional hompage – link above)  This fairly short bill, as introduced, has two major points and a “sense of Congress” statement.

I. The OSS/SBRA bans retroactive taxation of internet commerce

The proposed act bans states from compelling collection of sales tax for sales that occurred before the June 21, 2018 Wayfair opinion. It pairs this with a phase it that, in the initial draft, begins on January 1, 2019. This raises the question, of course, of what to do with sales that occur in the intervening period.

II. The “Sense of Congress” statement can be read to say “We don’t want to tell you (states) what to do but you’re making us do it”

The “Sense of Congress” statement essentially says that Congress really wants the States to develop an interstate compact that identifies a minimum substantial nexus, that simplifies registration and compliance, and that eliminates the need for the “Small Business” remote seller exemption.

III. The OSS/SBRA creates a rather large “small business” remote seller exemption

The proposed act also proposes to restrict States from collecting sales tax from customers that have $10 million in annual gross receipts during the preceding calendar year where: (1) the sale is made on or after June 21, 2018 and (2) before the date 30 days after the date where the States develop and Congress approves an interstate compact, applicable to the State and sale, “governing the imposition of tax collection duties on remote sellers.”

Setting aside the rather valid question/criticism of whether $10 million in gross receipts is a “small” business, it’s our thought that there is a question about whether purported requirement for Congressional approval of a multistate remote seller tax compact meets the criteria of Virginia v. Tennessee, 148 US 503 (1893), and it’s progeny. The Supreme Court in Virginia v. Tennessee, first articulated the idea that only agreements which would increase the power of the states at the expense of the federal government require Congressional approval.  It’s hard to see how federal sovereignty is imperiled by 45 different state approaches to Wayfair. Other tax compacts between the states, including the Multistate Tax Compact, have not received congressional approval. Therefore, it seems unlikely that the states who are struggling to address the application of Wayfair to their state tax collections will be thrilled about this bill as written.

We’ll keep you updated as this continues to evolve!

Valerie Sasaki specializes in jurisdictional tax consulting, working closely with Fortune 50 companies involved in audits before the Oregon or Washington Departments of Revenue. She also works with business owners on tax, business, and estate planning issues in Oregon or Southwest Washington.