While practitioners and business owners alike know that the Wayfair v. South Dakota decision opened the floodgate to state legislatures excitedly frothing with the desire to capture millions of sales tax dollars escaping their grasp via online sales, many have overlooked the fact that the United States Congress has been paying attention too; and the result is a tax policy case study for the ages.
The Online Sales Simplicity and Small Business Relief Act of 2018 (H.R. 6824), first introduced in the House of Representatives on September 13, 2018 by Rep. Jim Sensenbrenner (R‑Wis.), aims to ban states from “retroactively” imposing sales tax collection duties on remote online retailers by requiring all states to hold off on implementing an “economic nexus” standard until January 1, 2019. The bill also seeks to codify a small-seller exemption for sellers with gross annual receipts below $10 million nationwide.
This “small-seller” exemption is particularly worthy of examining, as it seeks to impose a Federal threshold on the states. The South Dakota statute evaluated in the Wayfair decision bases the economic nexus threshold on a remote seller’s total number of sale transactions or gross receipts from sales transactions in South Dakota – any remote seller with $100,000 or more in gross receipts from sales, or with 200 or more individual sales. The proposed bill would have the effect of trimming back South Dakota’s economic nexus standard based on the size of the seller, which is potentially problematic for South Dakota. For example, a Minnesota seller with $9 million in gross receipts, $8 million of which are to South Dakota, would not pay any sales tax if the H.R. 6824 passes, but would pay sales tax of up to 6.5% on $7.9 million under the state’s current statute.
The proposed prohibition on “retroactively” requiring remote sellers to collect sales tax would require many of the 30 states that have already enacted statutes or promulgated rules defining economic nexus to refund any sales tax collected from remote sellers prior to January 1, 2019. Notably, 20 states currently require collection of sales tax on remote sales transactions prior to that date. The Tennessee Department of Revenue has issued Sales & Use Tax Rule 129(2), but has not set a compliance date due to pending litigation.
For states that rely heavily on sales tax revenue, like Tennessee, this is a question of livelihood. South Dakota, a state ranking 46th in population according to the U.S. Census Bureau (less than 1 million as of July 2017), lost out on $48 to $58 million in sales tax revenue every year under the Quill standard. In contrast, Tennessee has a population of nearly 7 million, and stands to collect an additional $200 million in annual sales tax from remote sellers, and Tennessee Republican legislators, including Sen. Bob Corker and Sen. Lamar Alexander, support the Wayfair decision.
The most interesting part of this entire policy debate is the pro-business platform shoving match within the Republican Party. Congressional Republicans, like Rep. Sensenbrenner, in working to pass the Online Sales Simplicity and Small Business Relief Act of 2018, argue that state sales tax statutes seeking to collect on pre‑2019 sales, and/or sales by remote sellers with annual gross receipts of less than $10 million overburden businesses. Conversely, Republican state legislators and governors back up their states’ efforts to capture additional sales tax from online sales arguing that a limit on the states’ ability to do so forces individual states to discriminate against local businesses in favor of remote sellers.
Regardless of your position, Wayfair managed to do something Quill never did in its 26‑year reign; Wayfair made Congress pay attention to state sales tax policy.
Ashley Hodges Morgan is based in the firm’s Memphis office. She focuses her practice on business and transactional matters, as well as federal, state and local taxation, including United States Tax Court litigation, letter ruling requests, civil tax disputes and controversy involving the Internal Revenue Service and various state and local tax authorities. Additionally, Ms. Morgan represents and advises accountants across the United States regarding mitigation of potential malpractice claims, malpractice defense and disciplinary proceedings.
Ms. Morgan and her husband, Cade Morgan, reside in Downtown Memphis.