State of overreach: Fighting back against burdensome state tax policies

While much of the recent attention in Washington has been focused on simplifying the tax code for small businesses, businesses small or otherwise that sell their products nationally have experienced increasingly complex tax regulations from the states in recent years. This stems from rogue states imposing burdensome tax reporting and collection requirements, which not only contradict Supreme Court precedent, but especially and disproportionately harm smaller businesses with limited means.

While cross border taxation and regulation has long been an issue for small businesses to comply with, a recent flurry of state policies has only increased the burden. The Alabama Department of Revenue issued a notice in late 2015 that required out-of-state businesses to collect and remit Alabama sales tax on sales to Alabama-based customers, regardless of whether the businesses have a physical presence in the state. In 2016, South Dakota passed similar legislation. This past April, the Massachusetts Department of Revenue issued a directive requiring retailers to collect sales tax from out-of-state vendors that use cookies on customers.

{mosads}These policies are a direct affront to the Supreme Court’s 1992 decision in Quill v. North Dakota, where the Court interpreted the Constitution’s Commerce Clause to mean that businesses must have physical nexus in a state in order to be required to collect and pay sales and use taxes. However, state policymakers are banking on the fact that small businesses will lack the time and resources to challenge their overreaches in Court, which will allow them to continue these unlawful taxing regimes.

Moreover, Colorado approved legislation in 2010 requiring out-of-state businesses to report the purchases of Colorado residents to the state’s Department of Revenue. This “tattletale law” seeks to sidestep the constitutional findings of the Quill decision, but still violates the spirit of the decision and imposes compliance burdens for small businesses in Colorado. Other states like Louisiana have followed its lead. Interestingly, 78 percent of Coloradans viewed this as a gross violation of their privacy, according to a recent NetChoice poll.

Fortunately, Senior House Judiciary Committee Member James Sensenbrenner (R-Wis.) on June 12 introduced the No Regulation without Representation Act of 2017 to combat states’ overreach. The bill would codify the Supreme Court’s Quill decision, which would thus bar states from imposing collection burdens for sales and use taxes on out-of-state businesses lacking physical presence.

The bill would effectively protect small businesses from burdensome compliance with a crazy quilt patchwork of state policies without impinging on a state’s ability to continue regulating businesses within their borders – and to insist that products entering their jurisdiction comply with national standards. The bill would use traditional factors to define physical presence (such as the owning or leasing of property, employee or contractors in the state, etc.) while excluding the more recent and questionable bases on which states have tried to shift regulatory burdens to out-of-state companies. The bill would only trigger the Commerce Clause when states try to regulate beyond their borders.

Moreover, Sensenbrenner’s bill would not prevent the resolution of the remote sales tax issue. His bill narrowly focuses on cross border regulation issues and Congress would remain free to craft laws that level the playing field and recover revenue for the states consistent with the physical presence principle established in Quill.

Short of resolving the internet sales tax debate, this bill would be a much welcomed first step in providing clarity and regulatory relief for remotely-located small businesses that sell their products nationally, while stopping the insanity that is legislative malpractice when states attempt to unilaterally contravene established Supreme Court precedent.

Hamilton Davison is President & Executive Director of the American Catalog Mailers Association, a Washington-based catalog industry advocacy group.

The views expressed by this author are their own and are not the views of The Hill.