On July 24, the House of Representatives Judiciary Committee held an informational hearing to discuss the South Dakota v. Wayfair Supreme Court decision. The hearing included remarks and testimony from retailers, advocates for tax reform and for small business, and legislators, and it sought to address the question of whether Congress should intervene in the aftermath of Wayfair.
The Supreme Court decision in favor of South Dakota served to overturn the physical nexus requirement for sales tax collection, meaning that states can now legally collect tax from remote retailers that conduct enough business in a state to constitute “economic nexus.”
The House Judiciary Committee hearing, “Examining the Wayfair Decision and Its Ramifications for Consumers and Small Businesses,” explored the questions that the Wayfair decision raises for lawmakers to address as they consider implementing economic nexus laws. The question on which the hearing was centered was whether Congress should act to clarify the law surrounding tax requirements for remote sellers and, if so, how.
The hearing opened with remarks from House members: Judiciary Committee Chairman Rep. Bob Goodlatte (R-VA), Rep. Jerrold Nadler (D-NY), and Rep. David Cicilline (D-RI). Rep. Goodlatte, a proponent of congressional intervention, highlighted concerns that included the increased cost of compliance for businesses, retroactive enforcement of economic nexus laws, and a ripple effect, in which states’ new authority in the realm of sales tax might signal the expansion of other taxes. Representatives Nadler and Cicilline, on the other hand, praised the Wayfair decision for closing the online sales tax loophole and cited the fact that large online retailers have begun collecting sales tax in response to Wayfair as evidence that Congress need not intervene.
Testimony was then offered by panelists both in favor of and opposed to congressional intervention. Grover Norquist, president of Americans for Tax Reform, expressed opposition to economic nexus laws as taxation without representation.
Chad White, owner of Class-Tech-Cars, Inc., expressed concern over “the risk of audits by far-away states and compliance measures in the thousands of jurisdictions across the country.” He asked Congress to pass legislation to protect small businesses from burdensome tax requirements.
The general counsel and chief strategy and innovation officer of the American Legislative Exchange Council, Bartlett Cleland, also voiced the opinion that Congress should intervene. He argued that the Wayfair decision is a threat to the free market, limited government, and federalism. He called on Congress to act to protect interstate commerce, making specific recommendations that included a moratorium on states passing laws in response to the court’s decision during which Congress could assess the adequacy of a physical presence standard and simplification of sales tax administration. Andrew Moylan, the executive vice president of the National Taxpayers Union, reiterated this call for a moratorium on economic nexus laws.
Andrew Pincus, a partner at Mayer Brown, expressed concern that the Court did not clarify specifically what economic threshold would adequately distinguish between small and large businesses so as to pass constitutional muster. Thus, as states begin passing new economic nexus laws with varied threshold requirements, businesses might be forced to comply with burdensome tax laws even if they are later challenged and deemed unconstitutional, because, under the federal Tax Injunction Act, a party is not allowed to sue for a declaratory judgment or an injunction invalidating a tax before compliance is required.
Speaking on behalf of the National Retail Federation in opposition to congressional intervention, Lary Sinewitz, executive vice president of BrandsMart, shed light on how the tax shelter provided by the Quill v. North Dakota physical presence requirement gave online retailers an unfair advantage over bricks-and-mortar stores. He discussed the widespread phenomenon of customers using bricks-and-mortar stores to browse goods and then, after making a decision on a product, ordering from an online competitor to avoid paying sales tax. Sinewitz addressed concerns about the cost of compliance for businesses by discussing how his own company was deciding between several affordable options for tax compliance software.
On behalf of the National Conference of State Legislatures, Utah State Senator Curtis Bramble argued that Congress should not impede the right of states to enforce their own laws regarding sales tax collection. Joseph Crosby, CEO of MultiState Associated Incorporated, asserted that “there is no immediate problem requiring a congressional solution,” and that any future congressional intervention should be deliberative and follow regular order.
Following the witnesses’ testimony, committee representatives posed questions and, in turn, the panelists offered responses to the issues raised. The discussions demonstrated the committee’s concerns surrounding the implications that the Wayfair decision will have for small businesses as well as repercussions for other taxes. The question-and-answer period addressed a range of issues, including questions about whether economic nexus laws create a new tax, whether a remote retailer will have to retroactively collect tax after it meets the economic threshold in a state, and the role of online marketplaces like Amazon or Etsy in sales tax collection.