In the wake of the Supreme Court’s recent decision in the case of South Dakota v. Wayfair, state governments across the U.S. are aggressively moving to expand their taxing authority outside their borders. This will threaten interstate commerce and particularly harm small internet businesses. Congress can mitigate these new threats to the economy, but only if they act quickly.
After failing to convince Congress to pass a law granting them the power to tax non-resident businesses, states took matters into their own hands by passing unconstitutional laws with an eye toward convincing the Supreme Court to take up a case. In South Dakota v. Wayfair, the Supreme Court did just that, overturning decades of common-sense precedent by ruling that states can require collection of their taxes by businesses with no physical presence inside their borders. The resulting rush of state actions could force sellers all across the country to collect and remit sales tax for as many as 12,000 taxing jurisdictions nationwide, a task that would be difficult for any business but is particularly burdensome for small businesses.
This week, the House Judiciary Committee is holding a hearing that will determine how, if at all, Congress could respond to the Wayfair decision. The hearing can serve as a first step to Congress acting to prevent the harmful disruption to prudent tax administration that is currently brewing at the state and local level.
While the Court gave some cursory guidance to states to reduce the compliance and interstate commerce burdens of such collection schemes, a few sentences in a majority opinion is no match for congressional legislation in setting out clear standards. For example, the Court indicated that it views favorably a simplified statewide administration program for sales taxes, but stopped short of clearly requiring it in order for a collection regime to be constitutional. It also distinguished between large businesses and smaller ones, citing South Dakota’s small seller exception as a key feature minimizing its negative impact on internet commerce, but did not clearly identify a specific minimum threshold for constitutionality and left resolution of that question to a lower court.
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No Supreme Court case involving one small state can possibly set reasonable nationwide standards. That is why this week’s hearing is vital in starting the important work of Congress to craft a solution to end confusion. Sensible rules that minimize burdens to interstate commerce and mitigate the impact on small internet retailers are necessary.
This work cannot begin quickly enough. States are proceeding with abandon on laws that may not meet current constitutional standards, while vexing and unanticipated questions in many other areas of law are surfacing. Though Wayfair was a sales tax case, practitioners are only now beginning to investigate the full impact it could have in business income tax, individual income tax, and regulation issues that cross state borders.
Much as controlling a nuclear reaction requires the insertion of control rods to slow the fission process, controlling runaway state actions that could damage interstate commerce requires congressional action to slow and rationalize the process.
First and foremost, Congress should act to stop a mad dash for new cross-border power. Then it can do the difficult but necessary work of establishing a responsible national approach to the vital questions surrounding taxes and the internet. The fact that the House Judiciary Committee is holding this hearing is a good sign that Congress is taking this issue seriously. A real fix is needed if businesses across the country are to be protected from the massive, new and complex taxing schemes that could be leveled soon by state governments.
Andrew Moylan is Executive Vice President with the National Taxpayers Union Foundation.
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