The voices of Tax Policy Center's researchers and staff
Now that the Supreme Court has made it easier for states to require online retailers to collect sales taxes, how will states and Congress respond? At a Tax Policy Center event this morning, Senator Heidi Heitkamp (D-ND), a leader in a long-standing but unsuccessful effort to create congressional rules of the road for online sales tax collections, said that Washington should now take a back seat to the states.
At the event, a panel of tax experts predicted that states likely would act within the next year or 18 months to expand their collections requirements. Some states may be able to set a collection regime by the end of this year.
Give states a chance
“States should be given an opportunity” to respond to the High Court’s South Dakota v. Wayfair decision, Heitkamp said. Last week’s 5-4 ruling said states could require online retailers to collect sales taxes even if they don’t have a physical presence, such as a store or warehouse, in the jurisdiction. But the Court didn’t give states carte blanche. Rather it set out two overriding principles: A state tax system should not discriminate against out-of-state businesses and it should not place an “undue burden” on interstate commerce.
The Court didn’t say explicitly how states could do that, but it did lay out something of a roadmap that follows elements of South Dakota law such as requiring collections only for future sales and exempting very small retailers. The Court also gave states other boxes to check: For example, tax systems can’t be too complex (whatever that means), and should limit administrative and compliance costs.
The big question now: How will states meet each of those goals? There are three alternatives—states can do it on their own, they can work collectively, or they can leave it to Congress.
Even post-Wayfair, congressional action seems uncertain. Lawmakers are deeply divided on nearly everything. This issue is no exception. Conservatives believe that collecting tax on online sales constitutes a tax increase. And any effort to enhance sales taxes is opposed by lawmakers from the states that currently do not charge those taxes.
More than two decades ago, in the case Quill Corp. v. North Dakota, the Supreme Court upheld that physical presence requirement but opened the door for Congress to revise it. For 26 years, Congress was unable to walk through the door. In large part, that inaction drove the Supreme Court to revisit the issue in Wayfair.
The shifting burden
Heitkamp, who brought the Quill case to the Supreme Court as North Dakota’s tax commissioner, had been a leading voice for congressional action to reverse Quill. But today, she said, “the hands have shifted.” After Wayfair, states no longer must wait for Congress to give them permission to require online sellers to collect tax. The burden is on Congress to act if it wants to change the states’ direction.
And Heitkamp, for one, is no longer in any hurry for Congress to write the rules. Now, she’d rather give states the opportunity to act. If they cannot do so, or appear to be ignoring the Court’s guidelines about simplicity, Congress could try to step in.
There already are mechanisms for the states to work together. With Congress paralyzed, states attempted to address some of the Court’s concerns in Quill. For instance, more than half of the nation’s sales tax states are participating in the Streamlined Sales and Use Tax Agreement, a compact aimed at simplifying wildly disparate state tax rules and making it easier for remote sellers to collect and remit taxes.
Making life easier
In Wayfair, the Court explicitly recognized the Streamlined Sales tax initiative, seemingly giving states something of a safe harbor in their efforts to develop simplifying rules.
It is unlikely that all sales tax states will join this effort, however. Large states such as California and New York, rarely defer to smaller jurisdictions in issues such as this. However, even if they don’t formally participate, they are likely to move in a roughly similar direction.
Now, online sellers are on the defensive and are likely to push states to reach consensus on key compliance issues. After all, it is much easier for an online retailer to comply with one set of rules than dozens, or thousands.
State efforts are not likely to result in a single uniform tax base, and they surely won’t set one tax rate. But they should be able to make life easier enough for e-tailers to meet the Supreme Court’s Wayfair standards. If they do, Congress will have to find something else to do.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Ting Shen Photography