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State of Wayfair: Sales Tax Patchwork ‘Nightmarishly Complex’

March 2, 2020, 10:10 PM

Small businesses confront “nightmarishly complex” tax administration duties in the era of e-commerce and will ask Congress to impose a “straightforward taxing regime” across the 46 jurisdictions that have statewide sales taxes.

Testimony prepared for a House hearing on Tuesday contains pleas for federal intervention leading to a harmonized system, from small retailers frustrated by the patchwork of rules, rates, and administrative tasks in state sales tax laws.

Those laws proliferated after the U.S. Supreme Court’s 2018 ruling in South Dakota v. Wayfair allowed states to impose taxes on sales by vendors without a physical presence in their states.

“A simple-straightforward taxing regime will not only alleviate the burden on our businesses, but also lead to increased compliance, and thus increased revenues to the states,” wrote Linda Lester, vice president of K-Log Inc., an Illinois-based office furniture retailer and one of three business representatives scheduled to speak.

Collecting and remitting taxes across thousands of jurisdictions is “nightmarishly complex for a small business,” Lester wrote in a statement for the hearing before the House Small Business Subcommittee on Economic Growth, Tax, and Capital Access. She said K-Log has already devoted 1,500 hours and invested $75,000 into an internal tax administration system responding to Wayfair-inspired state laws.

The Wayfair ruling created a framework for states to collect sales taxes from remote retailers. In Wayfair, the court tossed the physical presence standard affirmed in 1992’s Quill Corp. v. North Dakota, which limited the ability of states to tax remote sales.

Since the Wayfair decision, all but two of the sales-tax states have begun imposing remote sales tax based on the basis of economic activity, rather than physical presence. In addition, 38 states and the District of Columbia have passed marketplace-facilitator laws, which place a duty to collect and remit sales tax on large websites that broker transactions.

Burdens for Small Businesses

Small businesses face three major challenges in the aftermath of Wayfair, Subcommittee Chair Rep. Andy Kim (D-N.J.) wrote in a memo prepared for the hearing. First, small sellers confront “exponential growth” in the number of states and localities for which they must collect and remit taxes. In addition, businesses are incurring significant expenses to comply with the 10,814 sales tax jurisdictions across the country.

“These compliance burdens have cost these businesses thousands of dollars each year,” Kim wrote.

Kim also pointed to aggressive enforcement tactics by some states for tax obligations incurred prior to Wayfair. California, Massachusetts, and Washington have asserted that sellers using marketplaces such as Amazon.com Inc. had physical presence in their states because inventory was stored in warehouses in those states. Prior to Wayfair and marketplace-facilitator laws, Amazon collected on sales of its own products shipped from warehouses, but not for third-party sales.

As an example, Kim pointed to a Michigan mattress retailer who faces $6.1 million in back taxes and penalties in California for transactions dating back to 2007.

Congressional Intervention?

Jamie Yesnowitz, a state and local tax practice and national tax office leader at Grant Thornton LLP, laid out a framework for congressional intervention on behalf of the American Institute of Certified Public Accountants.

In written testimony for the subcommittee, Yesnowitz said a growing number of states are imposing corporate income taxes on remote sellers following Wayfair, but significant disparities exist in each state’s nexus rules for the sales and income taxes.

While complete alignment for the income and sale tax programs, and across the states is “impossible,” Yesnowitz said, “it is possible for Congress to address the minimum standards for which both income and sales taxes will apply to a remote seller.”

He pointed to the Multistate Tax Commission’s factor presence nexus standard as a good template for Congress to consider. The standard provides “simple, certain and equitable” rules for the collection of state business activity taxes.
In addition, Yesnowitz called on Congress to impose clearer and more consistent definitions of marketplace facilitators across the states, and more effective tax administration for small businesses. On that latter point, Yesnowitz suggested standardized periods for measuring economic presence and clear taxability matrices for each state to “promote uniformity, certainty, and transparency.”

Sorry, AT&T

A committee of the Multistate Tax Commission turned down a request by telecommunications giant AT&T Inc. that the commission encourage states to adopt or amend their marketplace-facilitator laws with a “narrow” definition exempting large sellers.

Beth Sosidka, director of state and local tax policy for AT&T, in February asked the MTC to send letters to state tax administrators encouraging them to recommend their legislatures adopt the model marketplace-facilitator legislation proposed by the National Conference of State Legislatures. The NCSL “narrow definition” model would allow large sellers such as AT&T to opt out of having marketplace facilitators such as Amazon and eBay collect and remit taxes on remote sales. Such sellers would continue to collect and remit taxes on their marketplace sales on their own.

To honor Sosidka’s request, the MTC surveyed members of the commission’s Uniformity Committee, which recommends model statutes and policy guidance designed to achieve more uniformity in multistate tax situations. The group reported the results of the survey Monday: Three states recommended the request be sent to the committee for consideration, four recommended against forwarding it, and eight said it should remain with the work group for further study.

The Kentucky Department of Revenue said the issues weren’t ripe for enacting legislation. The Massachusetts Department of Revenue said the model law appears designed to replace existing state statutes in their entirety; the use of the narrow marketplace-facilitator definition—as opposed to a broader approach —should be based on states’ actual experience under their current statutes, it said.

The model law has been offered “late in the process,” Washington’s Department of Revenue said, well after most states have already adopted marketplace legislation.

Based on the survey responses, Tommy Hoyt, chair of the work group, said AT&T’s request wouldn’t be forwarded to the Uniformity Committee at this time.

Can We Get Some Conformity?

The Council on State Taxation, a trade association that represents businesses, is pushing Maryland lawmakers to bring a pending digital goods tax bill into conformity with the multistate pact aimed at sales tax simplification.

The 21st Century Economy Sales Tax Act (H.B. 932) broadens Maryland’s sales tax to encompass more online transactions. It also defines a “digital product” as something obtained electronically by a buyer and delivered through the use of technology “having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”

While COST doesn’t take a position on whether or not digital goods and services should be taxed, the business-focused trade association encourages Maryland to adopt “the ‘specified digital products’ definition and general sourcing rule from the Streamlined Sales and Use Tax Agreement.” That would “create more certainty over sales and use tax imposition and alleviate some of the risks of multiple taxation,” Stephanie T. Do wrote in a letter Feb, 27.

Money in the Bank

Part of a projected jump in New York City sales tax collections can likely be traced to payments from remote sellers and marketplace facilitators, according to the city’s Independent Budget Office.

The watchdog agency, in a Feb. 28 fiscal analysis, cited revenue from online sales as a reason for making an upward revision to its forecast for city sales tax revenue increases, to 6.9 percent in the fiscal year ending June 30. Strong city and national economic growth also account for the surge to an annual level of $8.35 billion. City sales tax growth will slow in the next fiscal year, to 3.1 percent, to be followed by “faster but still moderate” growth over the next few years, the IBO said.

—With assistance from Tripp Baltz in Denver, John Herzfeld in New York, and Samuel McQuillan in Arlington, Va.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bloomberglaw.com

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