The Commerce Clause of the Constitution provides that “[t]he Congress shall have Power . . . [t]o regulate Commerce . . . among the several States[.]”
On March 3, 2020, “South Dakota v. Wayfair, Inc.: Online Sales Taxes and their Impact on Main Street” was the subject of a hearing before the Subcommittee on Economic Growth, Tax, and Capital Access in the House of Representatives Committee on Small Business. Does this hearing signal that Congress will regulate to mitigate the effects of state and local taxation of interstate commerce after Wayfair?
Wayfair and the State and Local Response
By now, many sellers may be familiar with the Wayfair decision. Before Wayfair, the U.S. Supreme Court’s precedents held that a state cannot impose sales tax on a seller who lacks a physical presence within the state. (Quill Corp. v. North Dakota; Nat’l Bellas Hess, Inc. v. Dep’t of Revenue of Ill.) The court overturned those precedents in Wayfair. After Wayfair, the question is not whether the seller has a physical presence in the state but whether the seller “avails itself of the substantial privilege of carrying on business” in the state. (South Dakota v. Wayfair, Inc.) The state statute upheld in Wayfair only taxed remote sellers with annual South Dakota purchases totaling more than $100,000 in gross receipts or 200 or more separate transactions. The court found that “[t]his quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” (Wayfair) The court did not define the minimum level of gross receipts or transactions that would suffice to show such availment.
The Wayfair decision has newly exposed many sellers, including small businesses, to tax liabilities in other states. These sellers face significant compliance costs in navigating the panoply of state and local sales tax laws and related requirements. Forty-five states and the District of Columbia impose sales tax, and after Wayfair almost all of these jurisdictions have extended their sales taxes to sellers lacking physical presence. The reach of many local tax laws has similarly extended.
The March 3 Subcommittee Hearing
Both the majority and the dissent in Wayfair recognized Congress’ authority to set different rules regarding state and local taxation of remote sellers. (Wayfair (Chief Justice John Roberts, dissenting).) The issue came before Congress most recently in the March 3 hearing of the Subcommittee on Economic Growth, Tax, and Capital Access.
Subcommittee Chairman Andy Kim (D-N.J.) opened the hearing by noting that his committee was the first in Congress “to solely focus on the small-business impacts of the Wayfair decision.” Chairman Kim saw a need “to shed light on the problems that the Wayfair decision has created for small businesses” and to “explore some actions that Congress can take to bring much needed relief.” As part of this effort, he hoped that the hearing would “allow the voices of small business owners to be heard.”
The subcommittee heard testimony from representatives of three small businesses and the American Institute of Certified Public Accountants. Their oral and written testimony addressed complications in complying with state and local tax requirements after Wayfair, including:
- varying thresholds determining the seller’s liability for tax (including different standards on how and for what periods the thresholds apply);
- different standards for taxability and exemptions;
- different forms and filing requirements;
- the sheer number of taxing localities and their different requirements;
- the abbreviated period following Wayfair in which businesses had to comply with new state and local tax rules (e.g., some state tax liabilities arose within one week of the decision, and one arose on the day of the decision);
- limited assistance of the Streamlined Sales and Use Tax Agreement (which only 24 states have joined in order to simplify sales and use tax collection and administration);
- limited assistance from existing software and firms assisting with multi-state, multi-locality sales tax registrations and payments;
- states using sales tax registrations as a basis for imposing franchise, gross receipts, businessandoccupancy, and/or income taxes; and
- costs of tax and registration compliance when the seller is exempt from tax liability or has minimal tax liability; and
- states using marketplace-facilitator laws to go after taxes in pre-Wayfair periods, based on expansive interpretations of the former “physical presence” rule.
An emerging theme from the testimony seemed to be that sellers are not opposed to collecting and remitting tax. They are simply asking for a congressional resolution that could mitigate the great difficulty and cost of ensuring tax compliance across various states and localities. Illustrating their point, examples were given where certain sellers’ compliance costs exceeded their new tax liabilities.
Chairman Kim expressed his “hope that this hearing will serve as a springboard for members of Congress to work together to solve this issue.” While little action has been taken on them thus far, pending legislation addressing these issues includes the Protecting Businesses from Burdensome Compliance Cost Act of 2019, the Stop Taxing Our Potential Act of 2019, and the Online Sales Simplicity and Small Business Relief Act of 2019.
A Precedent in Public Law 86-272
Testimony in the hearing also alluded to past congressional action with respect to state and local taxation of interstate commerce, specifically Congress’s “Public Law 86-272.” (Codified at 15 U.S.C. Section 381, et seq.) Pub. L. 86272 limited the authority of a state or locality to impose net income tax on a remote seller’s income derived from interstate commerce.
Congress enacted Pub. L. 86-272 in response to language in a Supreme Court opinion that stated, “We conclude that net income from the interstate operations of a foreign corporation may be subjected to state taxation provided the levy is not discriminatory and is properly apportioned to local activities within the taxing State forming sufficient nexus to support the same.” (S. Rep. No. 86-658, at 2 (1959) (quoting Nw. States Portland Cement Co. v. Minnesota.)
It was noted in the House that this language caused the business community “serious apprehension” and “considerable uncertainty as to the kind and amount of local activity within a State which w[ould] be considered sufficient to support the imposition of a tax on income derived from interstate commerce.” (H.R. Rep. No. 86-936, at 1 (1959) (accompanying H.R. J. Res. 450, which also responded to the language in Nw. States Portland Cement Co.).) The Senate noted that many small- and medium-sized businesses engaged in interstate commerce were “fearful of the cost of compliance” in each state, “in large part because of the lack of uniformity in the laws of the various States in determining” their tax liabilities. (S. Rep. No. 86-658, at 3.)
Congress perceived a need to clarify business’ tax liabilities and to free them from “the kind of State taxation which would Balkanize the American economy.” (H.R. Rep. No. 86-936, at 2; seealso S. Rep. No. 86-658, at 4-5.) Pub. L. 86272 was the result.
The circumstances justifying federal legislation in 1959 seem similar to those today. Although there is bipartisan support for federal legislation in response to Wayfair, it remains to be seen whether there is the political will to agree upon and pass a bill through Congress. In the meantime, businesses large and small will have to live with the reality of Wayfair. It is in sellers’ best interests to work toward compliance as soon as they can. Otherwise, they may face an increasing risk of collection (and, potentially, penalties and interest) and enforcement action by any number of states and localities.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Robert Claiborne is an associate and Agustin Rodriguez is counsel in the Richmond, Va., office of Troutman Sanders LLP.