Tax & Budgets
States to Watch This Summer if You Care About Tax Policy
August 27, 2024 | Andrew Jones
UPDATED: The latest information on this issue is available here.
As we've noted before, sales tax compliance legislation has been one of the biggest tax topics addressed by state lawmakers this year. So far in 2017, lawmakers have introduced 77 such bills in 32 states. While many of these bills are in states that have adjourned or are close to adjourning, the sheer volume of introduced legislation is still instructive.What exactly are these bills trying to do? The purpose of all of them is the same: to promote collection of sales taxes by as many sellers as possible (including remote sellers) in the absence of congressional action.
Speaking of Congress, just last week the Marketplace Fairness Act (S. 976) was introduced in the U.S. Senate and the Remote Transactions Parity Act (H.R. 2193) was introduced in the U.S. House of Representatives. These bills would allow states to require certain remote (including online) sellers to collect sales tax, subject to specific stipulations. According to a press release from the Marketplace Fairness Coalition, the law, if enacted, “would only apply to online sellers that have sales of at least $1 million outside of states where they have physical operations, like a store or a warehouse.”
But until a federal law is enacted, states are pursuing their own solutions as best they can. These bills have used a variety of strategies to enhance sales tax compliance, which we've grouped into three broad categories:
- Economic Nexus Bills. These bills set aside “physical presence” as the standard for state authority to require sellers to collect sales taxes. Instead of focusing on physical presence, these bills set a bright line sales thresholds (in dollars or number of transactions or both), with sellers exceeding these thresholds required to collect legally due and payable sales taxes. These measures were inspired initially by U.S. Supreme Court Justice Anthony Kennedy, who, in his concurring opinion in DMA v. Brohl, invited the legal system to present the Court with a case that would allow it to revisit its holding in Quill. However, some policymakers are also of the opinion that modern e-commerce can be distinguished from the facts in Quill and physical presence isn't the correct standard for this new commerce—after all, they argue, the internet wasn't even legally available for commercial activity when Quill was decided. Regardless, these proposals are generating new revenue in the two states which have already implemented economic nexus—Alabama and South Dakota—which is garnering notice from other states. There are 17 active economic nexus bills, making this the most prevalent legislative strategy pursued.
- Expanded Nexus Bills. These bills aim to extend the physical presence standard to the existing constitutional limit. Many non-practitioners mistakenly believe that “physical presence” means that a retailer must have a store or a distribution center or own some other real estate in a state to be subject to sales tax collection. They may have heard of Quill, but they probably haven't read it. And it's unlikely they're aware or related cases such as Scripto v. Carson or Tyler Pipe v. Washington. The bottom line is that “physical presence” isn't clear; yes, it includes ownership of real estate, but it also has been interpreted to extend to activities of affiliates, agents, and others who are acting on behalf or in conjunction with the remote/internet seller. Examples of these “expanded nexus” bills include affiliate nexus, click-through nexus, and drop ship nexus. This category also includes extending the imposition of a sales tax collection obligation to new economic actors, such as marketplaces (assuming they have physical presence in the state; if they do not, then the bill falls under economic nexus). There are 15 active expanded nexus bills in state legislatures.
- Non-Nexus Collection Bills. Other sales tax compliance bills that don't address the nexus question often require out of state sellers to inform their buyers about the responsibility to pay sales tax on their purchases, typically with an annual mailer. We have seen this policy appear in several states so far this year (6 bills), both as part of standalone legislation and incorporated into larger legislative packages, but in light of the fact that the Supreme Court let stand the 10th Circuit Court's holding that these statutes are constitutionally permissible, it's likely we'll see them again this year. Colorado pioneered this approach, leading to the aforementioned Supreme Court decision (albeit on an ancillary issue). Opponents of the Colorado reporting law failed in their attempts to gut it this year in the legislature.
Of the 77 bills introduced, 30 of them contain economic nexus provisions, 34 of them contain expanded nexus provisions, and 20 of them contain reporting and notification requirements. Six of them also contain provisions that either urge Congress to act or instruct states to prepare for enactment of federal law. There's also a bill in Hawaii (SB 1413) that doesn't fit nicely into any of these categories but is still related. Note that these categories do not add up to 77 because some bills contain provisions in more than one category.
Check out the map below to see which states have considered (or are considering) sales tax compliance legislation in 2017, and what types of bills/provisions each state has introduced. For details on how to read this map, please see the notes below the image.
- Bills have been enacted in Alabama (SB 86), North Dakota (SB 2298), Virginia (HB 2058), and Wyoming (HB 19).
- Bills in several other states advanced past their chamber of introduction (in Arkansas, Georgia, Hawaii, Indiana, Kansas, Minnesota, Missouri, New Mexico, South Carolina, Utah, Virginia, and Vermont). Many of these states' regular sessions have adjourned, though carryover is possible in some of them. More info on session dates and carryover can be found here (note that blue rows indicate states that have adjourned).
For more information on any of these bills, check our snapshot here. For an explanation on current state laws regarding sales tax compliance, see this blog post from earlier this year.
