Content seriesView full content series
Does Online Sales Tax Reform Stand a Chance in an Election Year?by
Online sales tax reform is coming to the United States. The only questions are when it will happen and how. Either Congress will act and create a system that is fair for both in-state and out-of-state sellers, or the US Supreme Court will be forced to provide guidance on the constitutionality of state tax law schemes.
Conventional wisdom would tell you that basically nothing will happen in Congress in 2016, an election year, especially on any bills that might be perceived as creating additional taxes. We then wait until 2017 and see what emerges as legislative priorities for the new president. Online sales tax reform is unlikely to be at the top of that priority list, so now we’re looking at 2018 as the first chance for something significant to happen.
New Life for Marketplace Fairness Act
But supporters of online sales tax reform breathed new life into the possibility last month. The short story is that, at the 11th hour in 2015, legislators decoupled the sales tax components from the Internet Tax Freedom Act in hopes of sneaking the Internet Tax Freedom Act through as part of a broader customs bill. In order to get the customs bill passed, leaders in Congress negotiated with supporters of the Marketplace Fairness Act, who were holding up the customs bill from getting passed, and promised a vote on sales tax reform in 2016.
Proponents of the Marketplace Fairness Act are now expressing optimism. They point to the fact that even though he is opposed to the bill, Senate Majority Leader Mitch McConnell (R-KY) has promised a vote in the Senate. Similarly, Paul Ryan (R-WI), who is settling in as speaker of the House following John Boehner’s retirement in 2015, has promised action in the House. In the past, Ryan said that he supports “the concept” of fairness between brick-and-mortar retailers and the “big-box online sales company.”
Tough Sledding Ahead
Recently, Ryan seems to be moonwalking on the issue slightly by making no promises and encouraging the House Judiciary Committee to continue to take up the issue. And therein lies the problem. House Judiciary Committee Chairman Bob Goodlatte (R-VA) is opposed to the destination-based concepts in the Marketplace Fairness Act and has proposed “origin-sourcing models” instead.
If the Marketplace Fairness Act or something similar, like the Remote Transactions Parity Act, makes it out of the House Judiciary Committee and also survives a full floor vote, the Senate would likely only then take up the issue again. (The Marketplace Fairness Act passed through the Senate in 2013.) These are big ifs, and the safe money would be on something tripping up the bill along the legislative journey this year.
Court Challenges More Likely
If Congress fails to act, the battle will move to the courts. Just in the past few weeks, we’ve seen Colorado’s 2010 law that requires new notification and reporting requirements for out-of-state sellers get upheld by the 10th Circuit, South Dakota’s Legislature pass an “economic nexus” bill that would require remote sellers with more than $100,000 of sales to register and remit sales taxes, and Utah’s Legislature also debate a similar bill. All of these state laws test the very fabric of the Quill decision, which established that remote sellers are only required to register for sales tax in a state if they have a substantial nexus.
States will continue to look for ways to even the playing field between in-state businesses and their out-of-state competitors in the form of new laws similar to Colorado’s or through stepped-up enforcement mechanisms. Eventually, someone will bring a suit that challenges a state law on Quill grounds, probably in either Alabama or South Dakota. As Justice Anthony Kennedy hinted strongly in Direct Marketing Association v. Brohl, the Supreme Court is ready to take up such a case and fill the void that has been created by Congress.