Congress expected to consider online sales tax bill before year end

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In the wake of the U.S. Supreme Court’s watershed ruling this summer in South Dakota v. Wayfair, several states have moved quickly to adopt “economic nexus” standards for sales and use taxation. State economic nexus laws require remote merchants and online sellers to collect sales and use tax from in-state customers regardless of whether seller has a physical presence in the state. Rather than using an in-state physical presence to establish nexus, economic nexus laws trigger the seller’s duty to collect and remit tax with reference to the number of in-state transactions or volume of in-state sales. The South Dakota law at issue in Wayfair, for example, requires remote sellers to collect sales tax from their customers if they have 200 or more in-state transactions or $100,000 or more in in-state sales.

On July 24, 2018, soon after the court handed down its Wayfair ruling in June, the U.S. House Judiciary Committee held a hearing on potential congressional action to address the case. At the time, the conventional wisdom was that Congress would not move quickly to address the Wayfair case or related concerns that remote sales tax obligations harm business activity. 

Flash forward two months and Rep. Jim Sensenbrenner (R-Wis.) is now telling Bloomberg Tax that he is “very confident” that his bill, the Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6814) will be heard in the House of Representatives before the end of 2018.

The bill, which Rep. Sensenbrenner claims is a “transition bill” to clarify the court’s ruling, would:

  • Prohibit states from imposing sales tax collection duties on “remote sellers” for sales occurring prior to the Court’s ruling in Wayfair on June 21, 2018.
  • Allow states to impose sales tax collections duties on remote sellers only for sales occurring after Jan. 1, 2019.
  • Establish a “small business remote seller exemption” whereby states may not require remote sellers with gross annual receipts below $10 million in the U.S. to collect and remit sales tax.

“Remote seller” is a defined term in the bill that means a person without a physical presence in the taxing state. The bill further provides an extensive definition of “physical presence.”

Still, it remains to be seen how soon the House may take up the bill, whether or to what extent it may attract support, and how the outcome of the upcoming midterm elections could shape prospects for passage. While Congress has the power to regulate interstate commerce, there are also constitutional issues with Congress wading into the realm of state sales taxation and interfering with the ability of separate sovereigns to raise revenue for essential government services. At the same time, however, relatively recent federal legislation that restricts state taxation, including the Internet Tax Freedom Act, has passed into law despite these concerns. We will keep you posted as the latest developments with state and federal legislative emerge.

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