A Senate Finance Committee hearing on June 14, 2022, may lead to legislation affecting states’ treatment of sales tax.
The Supreme Court decision in Wayfair, which removed the physical presence test as a requirement for states to impose sales tax nexus, has altered the sales tax landscape of virtually every state since it was decided four years ago.
Four years ago, on June 21, 2018, the court overturned the Quill decision, a 1992 case that imposed the physical presence test on states seeking to collect sales tax from remote retailers shipping to residents in the state.
States acted with varying degrees of speed to enact legislation and promulgate regulations to take advantage of the revenue-raising opportunities the decision allowed. The effect of the decision has been felt by remote sellers and marketplaces, and in-state merchants throughout the country.
Online sales taxes are “a major source of headaches and costs for small businesses around the country today,” said Chairman Ron Wyden, D-Oregon, noting that the decision gave states “a green light to force small businesses into becoming tax collectors when they sell online — collecting taxes even for states where those businesses had no brick-and-mortar presence.”
“Small businesses had never been responsible for this kind of tax collection before,” he observed. “Almost immediately after the ruling came out, states across the country began passing these tax collection laws.”
The hearing could eventually lead to legislation, according to Scott Peterson, vice president of U.S. Tax Policy and Government Relations at Avalara and former executive director of the Streamlined Sales Tax Governing Board: “But how that plays out is still up in the air. The only clear theme was the lack of certainty around when a retailer should start collecting tax. And that issue is the result of considerable differences in state thresholds, and sellers not knowing when they need to collect. A U.S. map of states and their varying thresholds looks like a patchwork quilt, and it is onerous from a compliance perspective.”
The recurring theme in the hearing was “I have to pay someone to tell me how to start collecting,” remarked Peterson. “Both small-business witnesses made that statement, and committee members made similar statements — this is what they’re hearing from constituents. Businesses were unaware of tax collection obligations, and when they became aware they already owed back taxes.”
Peterson explained possible solutions that any proposed legislation might address.
“Before a state can require out-of-state retailers to collect sales tax, they must have made X amount of sales,” he explained. “One solution is to standardize on X across states. Ohio enacted a law that enacts sales tax on gross receipts, but that’s the only place in Ohio law where ‘gross receipts’ is used. After the initial group of states adopted Wayfair using South Dakota’s language, other states realized their existing statutes used language different from South Dakota, and proceeded accordingly. It’s plausible that Congress could create a uniform threshold, via their ability to regulate interstate commerce.”
The other theme during the hearing was the cost of compliance, Peterson said: “[Streamlined Sales Tax] has made strides in offsetting costs that retailers incur through sales tax compliance regulations.”
“Every retailer’s expenses are unique to them,” he explained. “One witness spent $500,000 and another witness spent $50,000 on sales tax compliance. Each retailer’s system is different, and each state’s Wayfair regulations are unique. The difference between the two businesses is that the business which spent $50,000 was relatively new. It was an internet-only business, and was built on modern technology. The business that spent $500,000 was founded 40 years ago and is brick and mortar.”
A legislative solution will likely build on the successful collaboration of Streamlined Sales Tax between states, local governments, and the business community. The court in Wayfair favorably mentioned the SST as one of the features of South Dakota’s law that “appear designed to prevent discrimination against or undue burdens upon interstate commerce.”
There are currently 24 member states that have simplified their sales tax systems and adopted a certified service provider model to reduce the compliance burden. SST states pay CSPs to handle sales tax compliance for qualifying businesses.