Should Congress limit the right of states to tax remote sales?

Since winning the right to tax remote sales in South Dakota v. Wayfair, Inc. (June 21, 2018), 30 states have adopted economic nexus policies that base a sales tax collection obligation on a remote seller’s business activity in the state. Although similar in nature, each policy is unique, and even subtle differences can make sales tax compliance more challenging for out-of-state businesses. Could this complexity compel Congress to act?

States spent more than a decade lobbying Congress to expand their tax authority prior to their victory at the Supreme Court. Yet aside from a short-lived win in the Senate in 2013, their efforts went nowhere. Divided and concerned about overburdening businesses, Congress couldn’t agree on a plan. It may have the motivation it once lacked now that states have dominion over remote sales.

At least three bills seeking to restrict how states tax remote sales have been introduced in Congress since the Wayfair decision:

• Online Sales Simplicity and Small Business Relief Act of 2018 (SB 3275, an updated version of H.R. 6824)
• No Retroactive Online Taxation Act of 2018 (H.R. 7184)
• Protecting Small Business from Burdensome Compliance Cost Act (H.R. 6724)

The Online Sales Simplicity and Small Business Relief Act of 2018 was introduced by senators from New Hampshire and Oregon, two of five states with no general sales tax. It would prevent states from taxing remote sales occurring prior to the June 21, 2018, Wayfair decision; prohibit the taxation of remote sales until January 1, 2020; and prohibit states from taxing businesses with less than $10 million in annual sales until states develop an interstate compact establishing a clearly defined nexus threshold for businesses, and a plan to simplify remote seller registration, collection, remittance, auditing, and more.

The No Retroactive Online Taxation Act of 2018 would ban the taxation of remote sales predating the Wayfair decision and limit how a state could define “physical presence.”

As its name suggests, the Protecting Small Business from Burdensome Compliance Cost Act would go further. In addition to prohibiting states from taxing remote sales occurring prior to January 1, 2019 (a date that would need to be pushed back), it would require states to:

• Provide a statewide, uniform tax rate no higher than the highest combined rate of all state and local taxes 
• Permit out-of-state vendors to remit sales taxes to one location
• Provide a statewide uniform provision for what is taxable 

There are compelling arguments for the simplification of remote seller sales tax requirements, which can vary a surprising degree from state to state. Yet more than 30 states have already adopted policies to tax remote sales. Whether Congress has the stomach to take on this issue remains to be seen. Stay tuned.

Avalara’s state-by-state guide to remote seller sales tax rules can help you determine where you’re at risk of developing a sales tax collection obligation.