The Supreme Court's 2018 ruling in the case of South Dakota v. Wayfair prompted a number of states to pass laws requiring out-of-state merchants to collect and remit sales taxes on online purchases by consumers in their states, but also led to a patchwork of laws that Congress is in the best position to fix, according to a new report.
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"Until recently, states could not require e-commerce businesses operating out of state to collect taxes on sales to residents of their state unless the business had a physical presence in that state," said the report. "This changed in 2018, and states quickly enacted remote sales tax requirements. However, this resulted in a complex patchwork of requirements—such as different exemptions for some small businesses in different states. Consequently, businesses face substantial compliance costs and uncertainty navigating these requirements. We recommended that Congress consider establishing guidelines to guide state taxation of remote sales to resolve these issues."
However, that's easier said than done as lawmakers have tried numerous times over the years to pass such legislation such as the Marketplace Fairness Act, which was introduced in 2013 and again in 2017, but failed to pass both chambers of Congress before the Supreme Court weighed in with its ruling.
The GAO report estimates nationwide remote sales tax collections last year reached approximately $30 billion. Businesses reported that they had to spend money on sales tax software to expand their multistate tax collection capabilities, along with extra fees for audits and assessments associated with increased tax jurisdiction exposure, plus the costs of staying up-to-date with all the changes legal requirements in multiple jurisdictions.
The report raises concerns about the overall remote sales tax system, including the equity of the system. Ever since the Wayfair ruling, and long before then, multistate sellers have needed to grapple with a patchwork of different requirements across the various taxing jurisdictions with which they have economic nexus. On the other hand, brick-and-mortar sellers generally have needed to grapple only with the requirements of the jurisdictions in which they're physically located, regardless of the states in which their customers live.
Remote sellers have needed to change their behavior and divert resources away from their business operations and investments, and toward tax compliance, limiting the number of states in which they can sell their products or the amount of sales in some states to avoid some states' requirements for remote sales taxes.
Businesses are dedicating substantial time and resources to multistate remote sales tax compliance, the report noted, and the numerous requirements and variations across taxing jurisdictions made it hard for businesses to understand their remote sales tax obligations. The administrative costs are mostly borne by businesses collecting from purchasers on behalf of the taxing jurisdictions.
The report discusses various proposals for remote sales tax reform, ranging from incremental ones that can be adopted by individual states to comprehensive proposals that would be adopted on a nationwide basis.
One proposal for incremental reform is for a state to adopt a single statewide point of registration, filing, administration and audit. A proposal for comprehensive reform is that states be required, as a condition of taxing remote sales, to participate in an interstate collaborative mechanism through which states agree on uniform standards and centralized processes. The
Still, that leaves out over half the states. "Some states and multistate organizations have taken some steps toward implementing some of the proposed incremental reforms, but a comprehensive approach has yet to be adopted," said the report. "While individual state actions may assist certain businesses in complying with a particular state's remote sales tax requirements, they do not alleviate the multistate complexities that exist. To date, there is no comprehensive approach in place that addresses multistate complexities and includes all states seeking to tax remote sales."
The lack of a uniform federal law translates into substantial uncertainty about what extent remote sales taxation is legally permissible for states and localities. The uncertainty extends to what connection (or nexus) a business needs to have with a state before the state can require the business to collect sales taxes on its behalf; when remote sales tax requirements violate the Constitution's prohibition on state laws that discriminate against or impose an undue burden on interstate commerce; and under what circumstances locally-administered remote sales tax requirements are constitutionally permissible.
As a result of this uncertainty, legal disputes over state and local authority to require sales tax collection have proliferated and can be expensive to litigate, leading to prolonged, uncertain outcomes. "Without a comprehensive approach in place, courts are left to address these issues on a piecemeal basis," said the report.
The right of states to levy taxes, and to empower localities to do the same, is a well-founded principle of state sovereignty under the commerce clause of the Constitution, the report acknowledged, and Congress has the authority to regulate interstate commerce.
"The Supreme Court has stated that Congress has the 'ultimate power to resolve' issues with taxation of remote sales," said the report. "Federal legislation which puts nationwide parameters in place for state taxation of remote sales could help address the uncertainties and multistate complexities and improve the overall system."
