sales tax, remote sales

Charge leveled against Sensenbrenner: There are 50 stars on the American flag, not 535.

Congressman Jim Sensenbrenner (R-Wis.) has introduced a 2017 version of the No Regulation Without Representation Act (H.R. 2887). The 2016 version, introduced by Sensenbrenner last July, did not make it out of the House.

The legislation was written to prevent states from “regulating beyond their borders by imposing sales tax collection requirements on businesses with no physical presence in the taxing state, and no vote in the representation that would implement such a tax.” As untaxed ecommerce transactions have multiplied, states have been expanding their sales and use tax laws to include businesses without a traditional physical presence but with other connections to the state, such as referrals on websites or affiliates. Sensenbrenner’s bill is meant to ensure “only businesses within a state are subjected to state tax obligations.

Physical presence leads to tax obligations

There are some differences between the two versions. However, like its predecessor, the 2017 measure permits a state to tax or regulate a person’s activities in interstate commerce only when “such person is physically present in the state during the period in which the tax or regulation is imposed.”

The bill lists the following ways physical presence can be established:

  • By maintaining a commercial or legal domicile in the state
  • By owning, leasing, or maintaining real property in the state (e.g., assembly facility, distribution center, manufacturing operation, office, retail store, or warehouse)
  • By leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state
  • By having one or more agents, employees, or independent contractors present in the state “who provide on-site design, installation, or repair services on behalf of the remote seller”
  • By having one or more employees, exclusive agents or independent contractors, engaging in activities in the state that substantially assist the person to establish or maintain a market there
  • By regularly employing in the state three or more employees for any purpose

No taxing businesses without a physical presence

The measure also stipulates what physical presence does not include. In so doing, it targets many existing state laws.

For example, the measure states a physical presence is not “entering into an agreement, under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the state, whether by an internet-based link or platform, internet web site, or otherwise.” This directly challenges state click-through nexus laws. Making “ownership by a person outside the state of an interest in a limited liability company or similar entity organized or with a physical presence in the state” not a physical presence invalidates state affiliate nexus laws.

According to the No Regulation Without Representation Act of 2017, physical presence also excludes the following:

  • Any presence in a state … for less than 15 days in a taxable year (or a greater number of days if provided by state law)
  • Product placement, setup, or other services offered in connection with delivery of products by an interstate or in-state carrier or other service provider
  • Internet advertising services provided by in-state residents which are not exclusively directed towards, or do not solicit exclusively, in-state customers
  • The furnishing of information to customers or affiliates in such state, or the coverage of events or other gathering of information in such state by such person, or his representative, which information is used or disseminated from a point outside the state
  • Business activities directly relating to such person’s potential or actual purchase of goods or services within the state if the final decision to purchase is made outside the state

Here we go again

The usual suspects tend to rally for or against federal bills regarding a state’s right to tax remote sales. The No Regulation Without Representation Act is supported by the American Catalog Mailers Association, NetChoice, Overstock.com, and other organizations opposed to letting states tax sales by out-of-state sellers. Overstock had this to say: “Under the states’ schemes of collecting at each customer’s residence, a remote retailer faces a morass of more than 12,000 state and local tax districts — all with special, ever-changing provisions, and each with individual audit authority.” This isn’t quite accurate. While there are approximately 12,000 tax jurisdictions, only about 250 entities have the ability to audit.

Opponents of the measure are also voicing their concerns. These include state and local governments that have seen their sales and use tax revenue decline as untaxed ecommerce sales have increased, as well as brick-and-mortar retailers whose sales have been affected by online competitors. In a letter to the House, the National Conference of State Legislatures called the No Regulation Without Representation Act of 2017 “constitutionally questionable” and said it would “strip states’ ability to govern.” Rather than address the growing problem of untaxed remote sales, it said, “this legislation would exacerbate it.” It added, “It is the obligation of states to remind Congress that there are 50 stars on the American flag, not 535.”

The NCSL, the National Retail Federation, and other groups support the Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017, which would allow states with simplified sales and use tax administration to tax sales by large out-of-state sellers.

Learn more about federal efforts to allow states to tax remote sales and the tax automation software that facilitates remote sales tax compliance.