Congressional Inaction on Internet Sales Tax Creates Adverse Reaction in the States | Citizens Against Government Waste

Congressional Inaction on Internet Sales Tax Creates Adverse Reaction in the States

The WasteWatcher

Private businesses and citizens are facing serious consequences from a Supreme Court decision that forces companies to collect sales taxes on internet sales whether or not they have a physical presence in a state.  Congress has added to the problems by failing to define physical presence or clarifying how states can impose sales taxes on online sales.

In 2018, in South Dakota v. Wayfair Inc., the Supreme Court reversed the 1992 case of Quill Corp v. North Dakota.  The Court determined that in Quill that a company must have a physical presence or “nexus” within a state’s boundaries before being required to collect sales taxes on behalf of the state.  Quill, relying on the Commerce Clause of the Constitution, made it clear that state taxing power was limited by state borders.

In Wayfair, the Court determined that physical presence is not necessary to tax and activity with “substantial nexus with the taxing State.”  The Court also found that Quill did not comply with its more recent Commerce Clause decisions.  The Court also suggested that this matter should have been resolved by Congress.

After Wayfair, states and local governments have quickly been enacting laws to force companies to take on the burdensome task of acting as tax collectors for potentially more than 10,000 separate tax jurisdictions, regardless of where the company and any of its facilities are located.  This has enabled states to define physical presence and decide how t0 impose the online sales tax.  

The online marketplace is defined by three different activities:  contracting with sellers to sell a product; communicating with an offer or acceptance between the sellers and consumers; and, facilitating the sale listings and customer service.

As the Supreme Court noted, Congress has failed to clarify how states can impose sales taxes on online sales for 28 years after Quilland continues to fail to do so. 

In 2013, Senator Mike Enzi (R-Wyo.) sponsored the Marketplace Fairness Act of 2013.  This bill would have forced retailers to collect taxes from those who made out-of-state purchases.  The Marketplace Fairness Act passed the Senate, but it did not go anywhere else after that.

In 2016, Congress also attempted to resolve taxing internet sales across state lines and defining physical presence.  Former Representative Bob Goodlatte (R-Va.) sponsored the bill which stated that “a State may impose a sales, use or similar tax on a seller, or impose on a seller an obligation to collect such a tax imposed on a purchaser, with respect to a remote sale of a product or service” if the state met these three criteria: 

  • “The State is the origin State for the remote sale
  • The tax is applied using the origin State’s tax base applicable to non-remote sales
  • The State participates in the State tax clearinghouse”

There are now three remaining states that have not implemented an internet sales tax on third-party sales by remote sellers. However, one of these states, Mississippi passed legislation. that would impose this tax with a 106-13 margin in the House and a 43-5 margin in the Senate. Governor Tate Reeves signed the bill which would impose a tax increase on consumers and require online retailers, like Amazon and Walmart, to collect taxes on items sold for other retailers. 

State Senator Chris McDaniel (R-Ellisville) stated that he is concerned that this would “increase this burden on taxpayers and we’re doing this at the worst time imaginable, when we’ve got job losses across the board.”  He also called it an opposite of what the state should be doing.  Earlier this year, Louisiana passed a similar law that will go into effect at the beginning of July 2020

Avalara, Inc. released a summary of state-by-state physical presence laws.  In many states, businesses are supposed to register with the Department of Revenue or a similar entity.  Some states do not have a sales tax while other states do.  Many states define physical presence as retail store, warehouse, inventory, or the when traveling salespersons come into the state.  Alaska does not have a state sales tax, but some jurisdictions have local sales and use taxes.  This creates confusion for online retailers and consumers alike.

Both private businesses and citizens are affected because of congressional inaction to define physical presence and not clarifying how states should uniformly impose online sales taxes across state borders.  If Congress had taken action before the Supreme Court’s decision in Wayfair, online sales taxes would not as messy as they are today.

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