South Dakota v. Wayfair Update: Quick congressional action appears unlikely
The U.S. House Judiciary Committee held a hearing on July 24, 2018 concerning how states may tax online retailers following the U.S. Supreme Court’s decision in South Dakota v. Wayfair in June. The court’s decision in Wayfair holds that states may require online and direct mail sellers to collect sales tax from their consumers, whether they have a physical presence in the state or not. Longstanding law had previously held that remote sellers must have a physical presence in the taxing state for a state to require the seller to collect sales tax from its customers.
We mentioned when Wayfair was decided that the power of Congress to act in this area is somewhat uncertain following the Wayfair case. Though Congress has the power to regulate interstate commerce, they do not have unfettered powers to strike down state taxes that allegedly interfere with interstate commerce. States have a competing interest as separate sovereigns to raise tax revenue to provide essential public services. In discussing to what extent Congress may “limit the lawful prerogatives of the states” to impose and collect sales tax, Justice Kennedy’s majority opinion in Wayfair states that “Congress cannot change the constitutional default rule.”
However, as a practical matter, Congress may not act in the near term because the issue is controversial and other congressional priorities are likely to be addressed first. Rep. Pramila Jayapal (D-Wash) is one member of the House Judiciary Committee who told Bloomberg Tax that congressional action is unlikely, as follows: “Congress is not acting on so many critical issues that we need to address … I think in this Congress it feels unlikely that Congress is going to take action, but I think that the Supreme Court gave us a really strong foundation and now if there are pieces that we need to plug in, that could be possible.”
Some witnesses expressed concern about the effect that the Wayfair case would have on small online businesses struggling to get off the ground. Others focused their testimony on the potential for states to retroactively require remote seller’s to collect tax from their customers, for periods prior to the court’s decision in June.
Most tax practitioners, however, do not expect to see retroactivity issues because states are expected to follow South Dakota’s lead in requiring remote sellers to collect tax. The South Dakota law that the court upheld in Wayfair does not apply retroactively and would apply to sellers who, on an annual basis, deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods or services in the state. Legal challenges to state laws that mirror South Dakota’s are not likely to succeed.
At least for now, the focus on legislative action in this area may be in state capitals across the country rather than the halls of Congress. Rather than encourage uniform state sales and use tax laws through congressional action, we may see more states voluntarily joining the Streamlined Sales and Use Tax Agreement (SSUTA) to achieve the same result through a multistate pact. South Dakota is a member of the SSUTA, of which 23 states currently belong.
For business owners, the focus may be on proactive efforts to comply with the law in the states where they operate. The tailwinds from the Wayfair case could result in additional state tax enforcement proceedings including sales and use tax audits. Our recent alert, “What the biggest sales tax case in 25 years means for your business,” discusses strategies to avoid costly penalties associated with non-compliance.