Critics of Online Sales Tax Ruling Urge Congress to Rein in States

WASHINGTON — Republican lawmakers left open the possibility on Tuesday that Congress could take action to legislate around a recent U.S. Supreme Court decision that paves the way for states to collect greater sales taxes from internet retailers.

But there are no signs yet that any legislation is gaining serious traction on Capitol Hill.

Tuesday’s discussion unfolded as the House Judiciary Committee convened to consider the ramifications of the June ruling in South Dakota v. Wayfair, Inc., which overturned a legal precedent that blocked states from gathering sales taxes from out-of-state online vendors.

Some of the witnesses who testified before committee were sharply critical of the Supreme Court’s decision and urged Congress to impose a moratorium, or to take other steps, to block or restrict new state sales tax policies put in place in light of Wayfair.

U.S. Rep. Bob Goodlatte, a Virginia Republican who chairs the committee, stopped short of endorsing a moratorium. But offered a downbeat view of the court ruling.

“The court’s close and incomplete decision in Wayfair has the potential to unleash chaos for consumers and remote sellers, particularly small business sellers,” he said. Goodlatte went on to say that the possibility states will seek to apply the tax retroactively “remains a real threat.”

Goodlatte, who is not seeking reelection in 2018 and is retiring from Congress, raised a number of technical issues about how state tax policies will be implemented in the wake of the ruling.

For instance, some states are expected to create a sales threshold, as South Dakota did, to guide whether an online business must collect taxes. Goodlatte said it remains to be seen whether these thresholds for small businesses will apply only at the state level or at the local level as well. Other unknowns: whether tax-exempt sales will count toward such thresholds, and what the ruling will mean for firms competing against overseas vendors.

“With so many unanswered questions, both sellers and states need time to figure out how to proceed,” he said.

U.S. Rep. Jerry Nadler, of New York, the top Democrat on the committee, said he believed two principles should guide discussions about online sales taxes. One is that the federal government should not intrude on state tax policy, and the other is that lawmakers should recognize there are existing “guardrails” in place to protect against discriminatory state tax laws.

“The courts are well equipped to consider the constitutionality of state tax collection,” he added.

Nadler also said that the Supreme Court decision in Wayfair provides states with a “clear roadmap” for structuring laws to collect sales taxes from out-of-state online vendors.

There have been efforts in Congress during recent years to pass legislation that would have established frameworks for states to collect sales taxes from out-of-state online retailers. The Marketplace Fairness Act, and the Remote Transactions Parity Act are two examples.

Goodlatte also pushed legislation in 2016 known as the Online Sales Simplification Act.

But each of these bills failed to win final approval in Congress. Longtime observers of the online sales tax debate point out that previously states were the ones urging Congress to take action on the issue, while e-commerce retailers and their allies opposed some of these efforts.

Now, however, that dynamic has reversed itself to some extent.

“In 26 years since Quill, Congress has not acted,” Utah state Sen. Curt Bramble, a Republican, said in his testimony, referring to Quill Corp. v. North Dakota, the 1992 Supreme Court case that last upheld the so-called “physical presence” sales tax rule that the Wayfair ruling nixed.

Bramble said his message to congressional lawmakers was that they “continue doing what this committee and Congress has done best on this issue … nothing, to not act.”

“This is something that states can effectively address,” he added.

Others who testified alongside Bramble don’t see it that way.

“Very important, that given the mess we’re in now, thank you Supreme Court, that we delay implementation until Congress has a chance to try and undo some of the damage that this decision made,” said Grover Norquist, president of Americans for Tax Reform, a group known for asking lawmakers to sign a pledge committing to oppose tax increases.

Norquist argues that the ruling opens the door for “taxation without representation,” and will undermine “competition” between states when it comes tax rates, regulation and other policy.

Inhibiting this sort of competition, Norquist suggested, allows for states to “export their failures” and “tells every corrupt city mayor, every incompetent governor: ‘you don’t have to have good government, you just have to be able to expand who you tax.’”

“And taxing people who can’t vote against you is a very interesting idea,” he added.

Andrew Moylan, executive vice president of the National Taxpayers Union Foundation, said that “states cannot be relied upon to proceed with caution” and that research his group has conducted shows at least eight states don’t have laws in place to ban retroactive taxation and also have not committed publicly to not seek tax collections on past sales.

Moylan said, in his view, Congress should implement a moratorium on Wayfair-related state tax policies, until the federal government and states address matters tied to the ruling.

Rep. Karen Handel, a Georgia Republican, who said she has “never been, frankly, a big fan of the internet sales tax,” asked Norquist if congressional lawmakers should consider coming up with far-reaching legislation in response to the Wayfair ruling, or if they should first craft a narrower measure to prohibit states from applying the online sales tax to past transactions.

“I’d go for as much as you can get,” he replied. “But I think retroactivity is the immediate danger.”

In contrast, Joseph Crosby, CEO of MultiState Associates, a firm that advises businesses and trade associations on state tax policy, told the committee that, in the wake of Wayfair, “There is no immediate problem requiring congressional action.”

He added that a moratorium, or even a ban on retroactive taxation would be “devilishly complicated.”

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