Congress Has No Business in Sales Tax Policy, State Agencies Say

Federal lawmakers should keep their hands off of state online-sales tax policies, despite small-business cries to Congress for some uniformity, state officials say.

Besides, some argue, Congress probably doesn’t have the time, patience or political will to tinker with a critical feature of state and local tax policy—sales tax parity between brick-and-mortar retailers and online sellers. The issue was a central theme during a recent congressional hearing that featured testimony from online businesses coping with cumbersome and inconsistent sales tax rules across multiple states.

“I would have a problem with congressional intervention and suggest they stick to their knitting,” said Wisconsin State Rep. John Macco (R), co-chair of the Task Force on State and Local Taxes of the National Conference of State Legislatures.

“Congress needs to clean up its own act before they try to come help us. As a free-market-Milton Friedman-Art-Laffer Republican, I’m not remotely interested in the feds trying to come in and dictate how business is done state by state.”

Given the major role sales taxes play in state budgeting, states would oppose “restrictions on our ability to raise revenues that are essential to meet citizens’ demands for services,” said Josh Pens, director of tax policy analysis for the Colorado Department of Revenue.

Rather than petitioning Congress for relief, Pens said the small business community should work with the key organizations tackling state tax administration including NCSL, the Multistate Tax Commission, the Federation of Tax Administrators and the Streamlined Sales Tax Governing Board.

“We have considerably more expertise about sales taxes than Congress,” Pens said.

“Let us continue to work through it,” added John Valentine, chair of the Utah State Tax Commission and second vice president of the Federation of Tax Administrators.

Pleas to Congress

The state officials’ comments came in response to a March 3 hearing before the House Small Business Subcommittee on Economic Growth, Tax and Capital Access.

The session focused on burdens small sellers face with state and local taxes enacted after the U.S. Supreme Court’s landmark 2018 South Dakota v. Wayfair Inc. The ruling set states free to collect sales taxes from retailers with no physical presence in their states.

Since Wayfair, all but two of the states with a sales tax have begun imposing remote sales tax based on some measure of economic activity—volume of sales into their states. In addition, more than 30 states have passed marketplace-facilitator laws, which impose tax collection duties on platforms such as Amazon and Etsy that host third-party sales.

Representatives of three small businesses told the subcommittee that they confronting “nightmarishly complex” tax administration duties. An executive of the Illinois-based office furniture retailer K-Log Inc., for example, told the subcommittee it had already devoted 1,500 hours and $75,000 to implement an internal tax administration system responding to state laws enacted since Wayfair.

They called on Congress to impose uniform rules across the 45 sales tax states and the District of Columbia.

Subcommittee Chairman Rep. Andy Kim (D-N.J.) sympathized with the businesses, saying they face “overwhelming and expensive” duties under Wayfair-inspired laws.

In a March 11 interview with Bloomberg Tax, Kim said he hoped to develop solutions that create more simplicity and predictability for retailers. He didn’t say if he favored a federal legislative fix, but emphasized the states would be part of any strategy he proposed.

“We want to do it in a way that respects states and has them in the process, too,” Kim said.

State tax administrators slammed the subcommittee for holding a one-sided hearing, ignoring the perspectives of revenue agencies and organizations coordinating tax policy.

“Any act of Congress to preempt states from enforcing their own laws will create market distortion that will result in higher income and property taxes as the sales tax will no longer be a viable revenue source,” NCSL executive director Tim Storey wrote in a March 2 letter to the subcommittee.

History Ignored

The leadership of the Streamlined Sales and Use Tax Agreement, a multistate compact aimed at sales tax simplification, is drafting a response expressing similar disappointment with the subcommittee hearing.

Craig Johnson, executive director of the organization’s governing board, said the hearing ignored five decades of history going back to the Supreme Court’s 1967 ruling in National Bellas Hess v. Department of Revenue of Illinois, which first established that a remote seller couldn’t be required to collect sales tax without a physical presence in a state.

During the intervening decades, Johnson said, the states begged Congress for help in creating a legal framework for taxing remote sales. He pointed to general support for the 2010 Main Street Fairness Act, the 2013 Marketplace Fairness Act, and the 2015 Remote Transactions Parity Act, which were never enacted.

In the face of congressional inaction, Johnson said, the states pursued sales tax uniformity through the SSUTA, which has formal support from 24 states and informal support from several others. The states also teed up litigation to challenge the precedents in National Bellas Hess and 1992’s Quill case—a path that eventually netted the Wayfair ruling.

After battling Congress and the business community for so many years, Johnson said, it is ironic that “the shoe is on the other foot.”

While the SSUTA states oppose federal intervention, Johnson said his organization wants to work with small businesses to improve tax registration and collection processes, and remove compliance burdens.

“I continue to be hopeful the states will come together to support remote sellers,” he said. “It’s in the sellers’ best interest and the states’ best interest.”

—With assistance from David Jolly.