On June 12, 2017, Representative James Sensenbrenner (R-Wis) introduced House Resolution (H.R.) 2887, or the No Regulation without Representation Act of 2017. This bill seeks to clarify what states can and cannot regulate when it comes to interstate commerce, including with respect to the collection of sales tax. These are issues that are becoming more and more urgent due to the increasing volume of online sales as a share of the market, and that trend is only going to grow for the foreseeable future.
What’s in the Bill?
The bill stipulates that states can only regulate interstate commerce when the person to whom those regulations would apply is physically present in the state. It goes on to define "physical presence" as:
- Maintaining a commercial or legal domicile in the state
- Owning, leasing, or maintaining real property in the state, such as an office, warehouse manufacturing operation, retail store, or other
- Owning or leasing tangible personal property (other than computer software) of more than a certain minimum value in the state
- Having employees, or other exclusive representatives including contractors, working in the state and engaging in activities that significantly help to create or maintain a market there
- Regularly employing three or more people in the state for any purpose
It’s important to note that, although the primary debate at this point is over the right to require out-of-state sellers to collect and remit sales tax on sales made to in-state customers, this bill is worded more broadly to encompass other aspects of interstate commerce as well. It also goes on to outline circumstances that do not constitute a physical presence. These include, but are not limited to:
- Arranging to work with someone in the state who can refer potential customers, whether for a commission or other form of compensation, and regardless of whether the reference is direct or indirect
- Any of the activities that do constitute physical presence if they’re only engaged in for less than 15 days in a taxable year
- The use of internet advertising services provided by in-state residents, as long as they are not only directed towards in-state residents
- Setup or other services offered in connection with delivery of products by an interstate or in-state carrier or other service provider
Quill Corp v North Dakota
The driving force behind this bill is the 1992 Supreme Court decision in the case of Quill Corp v North Dakota. The case involved an out-of-state seller, Quill Corp, with no physical presence in the state, but who’s in-state customers used proprietary software that Quill Corp provided to place their orders with the company. North Dakota’s claim was that the software constituted a physical presence, and so created a nexus for Quill so that they were required to collect and remit North Dakota sales tax on purchases made by in-state customers.
The Supreme Court ruled, however, that the software was not an actual physical presence, and so was not enough to trigger a nexus. It went on to say that requiring out-of-state sellers to collect and remit sales tax was an unmanageable burden, due in part to the fact that there was such a myriad assortment of tax rates and regulations when local jurisdictions were taken into account.
Since that decision was handed down, however, the internet has fundamentally changed the way many people shop, and the share of purchases made online has grown substantially. Because many of these sales are made by out-of-state vendors, this trend has led to a drop in sales tax revenue for many states, which is often a vital source of funding for an array of state-wide programs. It also puts local brick-and-mortar stores at a disadvantage, as they have to collect sales tax, while their online competitors often do not, allowing the remote sellers to charge less for the same products.
The Marketplace Fairness Act
Although the Supreme Court ruled against North Dakota in the Quill case, it left open the possibility that Congress could pass legislation to clarify the conditions under which states can require out-of-state sellers to collect and remit sales tax. That has led, of course, to the introduction of H.R. 2887, but it also prompted other legislation, including the bi-partisan "Marketplace Fairness Act of 2017".
This most recent incarnation of the bill would allow states that are full members of the Streamlined Sales and Use Tax Agreement (SSUTA) to compel any out-of-state retailer selling into their state to collect and remit sales tax on those sales unless they qualify for a small-seller exception. This exception would be available to any seller whose annual total remote sales within the United States produced gross receipts of $1 million or less.
Current Trends in State Sales Tax Laws
The Marketplace Fairness Act is much more in line with the current trends in state sales tax laws, with many states attempting to stretch their definitions of nexus to include such things as internet cookies and affiliate sellers. Some states have gone so far as to enact economic nexus laws as well, which stipulate that any out-of-state seller who meets certain gross receipts or total transaction thresholds in a year is considered for sales tax purposes to have a nexus in the state.
The constitutionality of some of these laws has been challenged in court, with the South Dakota economic nexus law in particular currently wending its way towards the Supreme Court. The goal of this case is to hopefully overturn the Quill decision due to the changes in circumstances in the intervening years since that decision was handed down.
Contrasted with these trends, H.R. 2887 stands out as an extreme step in the opposite direction. It would severely limit the ability of states to collect sales tax from out-of-state sellers, essentially codifying the ruling in Quill into law.