We Need a Uniform State Sales Tax System That Supports Commerce

A recent proposal asking Congress to set uniform state sales tax policies has sparked controversy, but it gets more right than wrong. With more than 13,000 distinct sales tax jurisdictions in the US, small businesses face huge compliance challenges that fuel an industry around sales tax calculation and services.

The current system burdens remote sellers. We need a clear path forward that safeguards state rights and is both simple and uniform. A collaborative approach can balance federal authority to regulate interstate commerce with incentives for states to modernize their systems.

Sen. Maggie Hassan’s (D-N.H.) proposal that Congress step in to standardize sales tax policies has caused some backlash—especially from state lawmakers and local tax authorities that would see their policymaking influence constrained.

But the realities that small businesses and remote sellers face under the current system merit equal consideration with state autonomy.

Since the US Supreme Court’s 2018 decision in South Dakota v. Wayfair—which allowed states to require sales and use tax collection from remote sellers with no physical presence in the state—remote sellers have grappled with a patchwork of sales tax regulations across potentially thousands of jurisdictions. This hinders commerce and creates unnecessary barriers to trade.

If tax policies of South Dakota are causing a small business in Michigan to reconsider whether they want to expand and sell to that state, for instance, it suggests Michigan’s rights are being affected: South Dakota’s policies are impacting Michigan’s economy.

The Constitution grants Congress the authority to regulate interstate commerce, which implicitly limits states’ ability to do the same. If tax policies in one state discourage businesses in another from expanding, that could be an infringement on the latter’s economic sovereignty.

Also, a small online retailer can easily be required to track and pay sales taxes in dozens of states—and perhaps dozens more local jurisdictions, each with its own rules. The administrative overhead and substantial cost that comes with it can stifle commerce.

Opponents of congressional involvement may argue that each state must decide how to set, collect, and enforce its own tax policies. Many state legislators may believe that managing their own tax system is essential to meeting their state’s specific economic needs. Some states, such as Alabama, eschew higher state-level sales tax rates in favor of pursuing other revenue streams.

State and even local jurisdictions may choose to set different sales tax rates based on infrastructure needs or economic priorities. The concern—for legislators, businesses, and citizens—is that by standardizing these policies, Congress might impose a one-size-fits-all solution that doesn’t account for those particularities.

The state sovereignty concerns are valid, but they’re at least matched by the growing burden the patchwork status quo places on businesses. In Wayfair, the Supreme Court itself acknowledged the ability of Congress to intervene and pursue uniformity.

A federal initiative could streamline the sales tax landscape by establishing clear rules and protections for small sellers. For instance, Hassan’s proposal includes an exemption for small remote sellers with less than $10 million in annual sales, along with safe harbors for businesses that make good-faith errors in tax collection.

But any successful proposal needs to address resistance from those concerned that states would concede too much power if the federal government had more control over sales tax policies. This is where collaboration, rather than imposition, becomes key.

Adopting a standardized policy would be expensive, because outdated tax collection systems would need to be upgraded. By offering federal grants to modernize state tax systems, Congress could motivate states to streamline their sales tax procedures. Additionally, uniformity and economies of scale would reduce the cost of improving and maintaining those systems.

States that adopt uniform sales tax policies could be given more flexibility in administering federal tax credits and other federal programs as trusted compliance partners.

Existing collaborative programs between federal and state governments, including qualified opportunity zones and work opportunity tax credits, could be amended to offer those sales tax partner states broader discretion. This could include permitting states to set more tailored eligibility criteria, such as directing work opportunity tax credits toward local industries facing labor shortages.

Many of these proposed incentives could be channeled through the existing framework of the Streamlined Sales and Use Tax Agreement, a voluntary collaboration among 44 states aimed at simplifying sales tax collection. To date, 24 states have passed legislation conforming with the agreement, which provides a foundation for states to align sales tax rules and processes.

The agreement’s full member states have two sales and use tax rates: one general purpose rate that applies in most transactions and a second for food and pharmaceuticals. This contrasts with states such as Alabama, which isn’t a signatory and has separate rates for automative sales, farm sales, manufacturing sales, and general sales—in addition to myriad local rates.

Congress could use the agreement to channel federal grants and other incentives to participating states, rewarding them for adopting streamlined tax structures and uniform standards. Additional policies, such as the small remote seller exemption and the ban on retroactive taxation, plus safe harbors and compliance assistance, could be negotiated. By leaning on existing frameworks, Congress could enhance a collaborative model that already works rather than reinvent the wheel.

Sales tax uniformity isn’t only about encouraging compliance; it’s also about fostering a business environment in which small and remote sellers can thrive. By working together, state governments and the federal government can achieve the necessary balance for fair and uniform sales tax policies—the latter just has to tread lightly.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and adjunct professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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