Federal Online Sales Tax Legislation Seen On Hold Amid Court Challenges
Congress appears to be delaying development of online sales tax legislation until legal challenges to state laws make it through the courts, lawyers and lobbyists said in interviews. House Judiciary Committee Chairman Bob Goodlatte, R-Va., and other lawmakers who led past online sales tax legislation initiatives indicated continued interest in the issue but haven't reintroduced their bills. The issue also appears unlikely to be wrapped into the larger tax law revamp debate being spearheaded by President Donald Trump’s administration and Capitol Hill Republicans, officials said.
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Goodlatte told us he's “absolutely” working on his draft Online Sales Simplification Act (OSSA) but is still trying to reach a consensus on the bill before he formally files it. A draft, released in August, would address online sales taxes via an “origin sourcing” framework requiring online retailers to pay sales taxes based on the rules in their home state and the tax rate of the state where the purchaser resides (see 1608250062). Goodlatte released the draft OSSA text then in a bid to “bring things to a head” before the 115th Congress convened, but negotiations apparently “went on flatline,” an industry lobbyist said.
Retail groups that favored more controversial bills like the Marketplace Fairness Act (MFA) and the Remote Transactions Parity Act (RTPA) in particular haven't “bought in” to the OSSA language because they believe state-level legislative and court action could result in a more favorable outcome, an anti-online sales tax lobbyist said. “They have said they now have more confidence that the states can handle this on their own and that court cases will allow the states to overturn” the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, which bars states from requiring out-of-state businesses to charge state sales taxes, the lobbyist said. MFA and RTPA both seek to broaden states’ authority to tax remote sales.
MFA, RTPA and the No Regulation Without Representation Act, which would codify the Quill precedent, are being considered for reintroduction but lawmakers are monitoring outside developments in case they need to revise the bills’ language, said two Capitol Hill aides. Rep. Jim Sensenbrenner, R-Wis., filed the No Regulation Without Representation Act in July. NetChoice CEO Steve DelBianco and Information Technology and Innovation Foundation Vice President Daniel Castro separately noted Capitol Hill’s evident standstill on online sales tax issues despite Goodlatte’s work last year on OSSA.
“There doesn’t seem to be much momentum” for any particular bill right now, Castro said. Progress on online sales taxes will require “a really concerted push” that isn’t evident now, and the “longer this issue goes unresolved, the more states will try to work it out on their own,” he said. Lawmakers appear to be “waiting it out in the courts” before they act on legislation, said Americans for Tax Reform’s Digital Liberty Executive Director Katie McAuliffe. “There’s no need to waste political capital” on online sales tax legislation if courts resolve the issue first, she said.
DelBianco, McAuliffe and others pointed to the legal battle over South Dakota’s 2016 SB-106 online sales tax law as the court case with the strongest potential to affect federal legislation. SB-106 requires all out-of-state catalog and online retailers to collect sales taxes on purchases sold and shipped to customers within South Dakota if gross revenue of sales to customers in the state exceeds $100,000 or if the retailer completed at least 200 transactions with customers in the state. SB-106 mirrors elements of the failed 2010 Main Street Fairness Act (see reports in the July 7, 2010, and April 19, 2011, issues).
DelBianco said he's closely following South Dakota’s ongoing appeal to the state Supreme Court of South Dakota v. Newegg, Overstock.com and Wayfair, in which a state circuit court ruled SB-106 unconstitutional because of the Quill precedent. NetChoice and American Catalog Mailers Association (ACMA) separately won a legal challenge of the law last year. A South Dakota state government spokesman declined to comment on ACMA et. al. v. Gerlach and South Dakota v. Wayfair, but noted the government intends to file a petition with the Supreme Court for a writ of certiorari if the state court doesn't rule in the government’s favor. The government isn't enforcing SB-106 while it’s under legal challenge, the spokesman said.
North Dakota Gov. Doug Burgum, a Republican, signed SB-2298 into law earlier this week but the bill includes language that will make it effective only if the Supreme Court overturns Quill or otherwise confirms a state “may constitutionally impose its sales or use tax upon an out-of-state seller in circumstances similar to those specified” in the bill. SB-2298 will require sales taxes on online purchases from out-of-state retailers reporting gross sales above $100,000.
ACMA and NetChoice are also challenging the Tennessee Department of Revenue’s Rule 129, which requires out-of-state retailers to register with the state and charge a sales tax if they “engage in regular and systematic solicitation of consumers in Tennessee and who make sales exceeding $500,000” to customers who live in the state. Tennessee Chancery Court Chancellor Russell Perkins approved a temporary injunction Tuesday barring the state from enforcing the law, which would require out-of-state retailers to begin collecting sales taxes July 1, until the court rules on the legal challenge, DelBianco said.
DelBianco, McAuliffe and others also noted ongoing challenges to online sales tax statutes in Alabama and Colorado. Several noted ongoing interest in Colorado’s SB-238, which would alter "tattletale" elements of the state’s 2010 online sales tax statute set to take effect July 1 that would require out-of-state retailers to send notices to the Colorado Department of Revenue noting the identities of any in-state resident who spent at least $500 with the retailer. SB-238 instead would require only that the retailer email the information to the consumer for use in reporting use taxes to state authorities. The bill was set for a second reading Thursday in the state Senate. The Alabama Tax Tribunal is reviewing a legal challenge to that state’s online sales tax law.
Nearly 20 other states besides North Dakota have also been examining possible online sales tax legislation since January, but only Alabama, North Dakota and Wyoming have enacted bills. Alabama’s SB-86 requires all out-of-state retailers to report their sales to customers in the state. Wyoming’s HB-19 established an online sales tax for retailers that have gross sales of $100,000 or 200 transactions with customers within the state. The Nebraska and Virginia legislatures have passed bills that have yet to be signed by the states’ governors.