On Tuesday, June 24, the Judiciary Committee of the US House of Representatives held a hearing on “Examining the Wayfair decision and its Ramifications for Consumers and Small Businesses.” The hearing was scheduled at the direction of Rep. Robert Goodlatte (R-VA), Chairman of the Judiciary Committee and did not address any specific pending or former legislation, but instead was informational and used to assist the committee in determining whether and how Congress should intervene.
The hearing was in response to the US Supreme Court’s June 21, 2018 decision in South Dakota v. Wayfair striking down the physical presence requirement to satisfy the substantial nexus prong of the Commerce Clause, announced in Quill and National Bellas Hess, which barred states from imposing sales tax collection requirements on certain out-of-state sellers. The physical presence rule challenged in the case has long been criticized as giving out-of-state sellers an advantage.
House members began the hearing by expressing their various positions, with Rep. Goodlatte outlining his reasons for why Congress should intervene. Among his concerns were Wayfair’s “potential to unleash chaos” in the form of (i) increased compliance costs for businesses, (ii) potential for states to retroactively enforce their economic nexus laws, (iii) the ebb and flow of businesses meeting states’ nexus thresholds, (iv) foreign countries using the decision and states’ arguments for economic nexus as arguments to assess their taxes on US businesses, and (v) the ripple effect on other taxes – principally corporate income tax. On the other side of the aisle, Rep. Jerrold Nadler (D-NY) opened by stating that the federal government should not intervene and that the courts were equipped to address sales tax collection requirements. He stated that large online retailers were already collecting, and many others had already changed their practices in light of Wayfair. Rep. David Cicilline (D-RI) agreed opining that the decision levels the playing field for small brick and mortar businesses by closing the “online sales tax loophole” created by Quill and that Wayfair has assisted with state budget shortfalls. The hearing included a number of witnesses testifying both for and against Congressional involvement.
Panelists in favor of Congressional involvement included:
- Grover Norquist (President, Americans for Tax Reform) who testified that the Wayfair court made a mistake and that the result of the decision violates the principle of “no taxation without representation.” He further testified that states have the ability to require their residents to pay use taxes, but choose to go after retailers as collection agents to prevent upsetting their electorate. Norquist also asserted that the economic nexus laws are not really about sales taxes, but are a pathway for states to impose their income taxes on out-of-state businesses and non-resident individuals.
- Chad White (Owner, Class-Tech-Cars, Inc.) who testified that sales tax compliance requirements were going to place a substantial burden on his business and could result in his business going from an auto parts retailer to a tax collection company.
- Bartlett Cleland (General Counsel and Chief Strategy Innovation Officer, American Legislative Exchange Council) who said he believes in limited government, the free market and Federalism and disagrees with the Wayfair decision. Cleland called for Congress to act to simplify the rules with bright line rules and clear guidance.
- Andrew Moylan (Executive Vice President, National Taxpayers Union Foundation) who testified that Congress should enact a moratorium on states passing laws in response to Wayfair because of the decision’s many unanswered questions. Moylan further testified that Wayfair, in striking down the physical presence rule, undermined the growth and innovation of small businesses.
- Andrew Pincus (Partner, Mayer Brown) who testified that small businesses needed to be protected in the wake of the Wayfair decision. In that vein, Pincus testified that because constitutional challenges to state taxes require the payment of the taxes before they may be brought, small businesses will be forced to comply rather than challenge the constitutionality.
Panelists against Congressional involvement included:
- Lary Sinewitz (Executive Vice President, BrandsMart, on behalf of the National Retail Federation) who testified that the costs associated with sales tax compliance were not expensive. Sinewitz said he was currently vetting three proposals from tax compliance software providers, with an estimated expense of approximately $30,000.
- The Honorable Curt Bramble (Past President, National Conference of State Legislatures) who testified that the states can effectively address the problems stemming from Wayfair and appreciates that small businesses can now maintain a competitive advantage.
- Joseph Crosby (Multistate Associates Incorporated) who testified that “there is no immediate problem” and that Congress intervening now will interfere with the economy. Crosby also testified that Congress cannot enact a prohibition on the ability of states to retroactively enforce their economic nexus laws.
In addition to oral testimony, a number of witnesses submitted written testimony which was entered into the record. Committee representatives, for and against Congressional intervention, followed up with numerous questions indicating that they are aware of the importance of these issues and the widespread effects of the decision.
The Committee’s greatest concerns center around: (1) the costs of complying with the Wayfair decision; (2) the ripple effect that could take place once the physical presence standard is no longer in place (i.e., implications for other taxes); (3) protections for small businesses; and (4) the retroactive nature of the new state laws. With Congress on the eve of its August recess, it is unlikely that these concerns or any other points raised in the Wayfair hearing will be addressed in the short-term.