This blog was last updated on October 29, 2024
When the United States Supreme Court ruled in 2018, that South Dakota’s law imposing sales tax collection requirements on sellers without in-state physical presence was constitutional, it did not grant states free reign. States are still responsible for ensuring that their sales tax requirements are manageable, and compliance costs are reasonable. While some states have responded by simplifying their tax rules, others have not, creating the possibility that Congress might intervene and impose challenging new requirements on states wishing to continue extending their tax obligations to remote sellers.
On September 25, 2024, the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth held a hearing entitled “Providing Small Business Relief from Remote Seller Collection.” Chaired by Senator Maggie Hassan, Senators Ron Wyden (D-OR) and Chuck Grassley (R-IA) also took part. It’s clear that Senator Hassan intends to introduce legislation in 2025 that would impose simplification requirements on states. As a representative from a state without a sales tax, her perspective is that compliance is far too costly and complex for small sellers. Since the hearing, Hassan released a “discussion framework” outlining her proposals. If enacted into law, all states would need to make substantial changes to their remote seller collection requirements.
Foundational Simplification Requirements for All States
Senator Hassan’s proposal, called the “Lowering Costs for Small Business Act,” would prohibit states from imposing tax obligations on smaller sellers and establish baseline requirements. These include:
- Prohibiting collection requirements on companies with less than $10,000,000 in “total remote sales” across the country as measured in the current or preceding calendar year.
- Banning retroactive tax collection from remote sellers for sales before June 21, 2018 (the date of the Wayfair decision).
- Requiring states to certify and contract with tax automation providers, making their software and services available free of charge to small sellers. States must also provide a detailed “product taxability matrix” and a complete “rates and boundaries database” linking state and local tax rates to specific locations.
- Holding remote sellers harmless for errors made by the states or third-party providers and, absent fraud, for transactions where purchasers may have improperly used an exemption certificate.
- Adopting uniform definitions for certain products and key terms like “sales price” along with standard rules for sourcing, bad-debt, sales tax holidays, refunds, returns, restocking, discounts, and coupons.
While these requirements are already largely met by the 24 member states of the Streamlined Sales Tax (SST) Governing Board, many non-SST states do not publish either taxability matrices or boundary databases and beyond SST, only the Commonwealth of Pennsylvania contracts with tax automation providers to offer free services to remote sellers. Most states hold sellers harmless only when they accept exemption certificates “in good faith” which is defined differently from state-to-state.
The ban on retroactive taxation likely addresses the few states that have pursued claims against remote sellers based on novel legal theories such as “cookie nexus.” Senator Hassan could also be suggesting that states drop all claims against sellers based exclusively on the presence of in-state inventory in third party warehouses. She could also be targeting states like South Carolina who are arguing that marketplace facilitators could be held liable for sales tax compliance for transactions occurring before their marketplace facilitator laws took effect.
What could be most disruptive, though, is the safe harbor for all sellers with less than $10,000,000 in “total remote sales.” Although the definition of “total remote sales” has not been finalized, a 10 million dollar threshold will unquestionably drop a substantial number of sellers from the state tax rolls, particularly those focusing their sales efforts on a handful of states.
Different Requirements for SST and Non-SST States
Recognizing the simplifications already undertaken by the 24 SST member states, the discussion draft proposes stricter requirements for non-SST states seeking to collect sales tax from remote sellers.
| Requirement | SST States | Non-SST States |
| Small Seller Exclusion | Less than $100,000 in in-state retail sales | Less than $1,000,000 in in-state retail sales |
| Number of Permissible Rate Combinations | One rate per zip code | One rate per state with permitted toggles for food or medicine |
| Filing Frequency | Quarterly – unless using a certified automation provider. Must create a centralized filing portal | Quarterly – but states must also set up a simplified registration system and a standard state/local return |
| Audit Centralization | A single “audit coordinator” if multiple states audit in a year | Single entity auditing both state and localities |
| Tax Base | Uniform tax base between the state and its localities | Uniform tax base between the state and its localities |
Notably, none of the SST member states meet all these requirements today. For example, only seven member states have a small seller exclusion based on retail sales (the rest use gross sales) and of those, only Tennessee dropped their total transaction count requirement.
While states like Indiana, Kentucky, Michigan, New Jersey, Michigan, and Rhode Island only apply a single rate within the entire state, other members have local rates that vary within a zip code. In these states, you often cannot determine the proper rate unless you have the customer’s full street address. A zip code does not suffice.
Finally, while the SST Governing Board sponsors an Audit Committee and centralizes some parts of the audit processes for sellers using a certified automation provider, member states retain full discretion to audit remote sellers not using a certified provider.
Can Congress Act? Should They?
The answer to the first question is yes. Under the US Constitution, Congress has the authority to regulate interstate commerce and in the years leading up to the Wayfair decision, there were no fewer than five legislative efforts aimed at enabling states to tax remote commerce. Most notably, the Marketplace Fairness Act of 2013 passed the full Senate but failed in the House. While each proposal differed somewhat in the details, they all proposed that states adopt certain “minimum simplifications” similar to what Senator Hassan is suggesting.
As to whether Congress should intervene, that question is more complex. Before Wayfair, states were feeling the adverse budgetary impact of eCommerce sales escaping taxation and were seeking Congressional action as a way of enabling collection of tax revenue on remote sales. In fact, the SST Governing Board was formed for the purpose of simplifying sales tax to make this argument even more compelling. Now, the circumstances have been reversed. Every state with a sales tax has adopted remote seller collection requirements and these same states will likely view any Congressional activity restricting their tax authority as a serious infringement of their state sovereignty.
In the intervening years since Wayfair, states like Alabama and Texas have adopted meaningful simplification for remote sellers. Other states seem to believe that Wayfair gives them the green light to do what they want and continue to make compliance unnecessarily complex. For example, both Colorado and Minnesota have adopted a “retail delivery fee (RDF),” which is an added, invoice-level levy on retail deliveries of taxable tangible property into their states. The Minnesota RDF is particularly complex as it extends to deliveries of non-taxable clothing (except diapers) but does not apply to deliveries of certain taxable baby products. The state of Nebraska recently authorized several new “Good Life Districts,” which are small regions within cities where sales are not taxed at the standard rate of 5.5% but at the special reduced rate of 2.5%. While Colorado created the SUTS program, simplifying registration and filing in participating home-rule localities, rates and tax rules still vary from locality to locality. Finally, while Illinois enacted rules purporting to “Level the Playing Field” between in-state and remote sellers, the task of filing and remittance for remote sellers remains incredibly difficult.
Some of Hassan’s suggestions would surely make sales tax compliance simpler. Today, every state has their own small seller exclusionary threshold and sellers need to understand how every sate counts eligible sales to know whether and when they become obligated to collect tax. Narrowing down those thresholds to three and providing sellers with sufficient time to register once they cross would certainly be easier. Likewise, having each state publish a boundary database would be useful so long as these databases are in a format that can be easily absorbed by tax engines. A taxability matrix would also be helpful, but only so long as it’s extensive, accurate, definitive and supported by legal/regulatory citations. And simple quarterly tax returns across the country would be a godsend to tax filers.
There are other simplifications not contemplated by Hassan’s discussion draft that would also move the needle. They include a true nationwide central sales tax registration system, a required sales tax amnesty that would bring even more remote sellers into the compliance fold, and a requirement that any changes to sales tax rates or rules cannot be enforced unless preceded by at least 90 days advance written notice.
Will this Proposal Move Forward?
It’s hard to say. Congress has long known that it has the authority to act but has consistently chosen not to. In June 2022, the full Senate Finance Committee held a hearing entitled “Examining the Impact of South Dakota v. Wayfair on Small Business and Remote Sales” and no meaningful legislation was introduced thereafter. Likewise, in November 2022 the Government Accountability Office published a paper entitled “Remote Sales Tax: Federal Legislation Could Resolve Some Uncertainties and Improve the Overall System” Once again, nothing material happened in its aftermath. The same was true when the US House Subcommittee on Economic Growth, Tax, and Capital Access held a hearing titled “South Dakota v. Wayfair, Online Sales Taxes and their Impact on Main Street” back in 2020. It is unclear whether this time will be any different.
Concluding Thoughts
States have had opportunities to simplify their remote seller sales tax requirements and while a handful have taken that charge seriously, most have only made modest changes, if any. The results of the 2024 election will decide the make-up and priorities of the 119th Congress, but the longer states fail to simplify sales tax on their own, the greater chance that Congress may opt to do it for them.
