By Adam Thimmesch
Hello everyone! I’m excited to be joining the Surly Subgroup and appreciate the opportunity to share some of my thoughts in thus forum. I’ve been at the University of Nebraska College of Law since 2012, and I teach Individual Income Tax, State and Local Tax, Corporate Tax, Corporate Finance, and Business Associations. Much of my research to date has focused on state-tax issues, though I’ve recently been spending time also thinking about how our tax systems intersect with individual privacy interests. I am looking forward to blogging about these issues—and maybe a good tax-and-soccer scandal from time to time.
This is a particularly good week to enter the blogging world as a state-tax guy. I woke up yesterday ready for a regular day of summer research and writing when this happened:
The #AmazonWashingtonPost, sometimes referred to as the guardian of Amazon not paying internet taxes (which they should) is FAKE NEWS!
— Donald J. Trump (@realDonaldTrump) June 28, 2017
Now, I’m generally inclined to not give much attention to our current President’s tweets, but it isn’t often that state-tax issues get presidential attention, so it seemed like a good opportunity to dig into the tweet a bit more. (Plus it gave me the opportunity to use a terrible Trump pun right off the bat as a blogger.)
Although the President’s tweet is difficult to interpret (and that’s being gracious), it appears that he was primarily attempting to criticize The Washington Post as “fake news.” That came a day after the paper reported on the fact that several of his golf clubs had posted fake Time magazine covers on their walls. Trump made this criticism, though, through an oddly constructed reference to the paper’s relationship with Amazon and Amazon’s position with respect to “internet taxes,” which most likely is a reference to the collection of use tax on online sales. (The Washington Post and Amazon are not related, of course, except that Jeff Bezos—the founder, chairman, and CEO of Amazon—purchased the paper in 2013.)
I’m firmly in the group of people who do not attempt to take anything of substance from the President’s tweets. But if we engage in the fiction that they actually reflect his policy views, the tweet is particularly interesting because it communicated that the President feels that Amazon should be collecting taxes on its Internet sales. Ignoring for the moment that Amazon does actually collect taxes for all states with a sales tax, this is very interesting. Many republicans and conservative groups like the Americans for Tax Reform, have battled efforts to require online vendors to collect taxes for states in which they have no physical presence. They view those obligations as “taxation without representation” and as job-killers. Trump’s suggestion that Amazon should be paying those taxes thus seems to conflict with that policy position. If Congress were to seriously take up legislation like the Marketplace Fairness Act, it would be interesting to know what Trump’s position would be and with whom he would side. (I’d also personally like to see if the President has self-reported use tax, but there’s that pesky refusal to release his tax-returns issue…)
Aside from its drastic revenue effect, the “Internet sales tax issue” is particularly interesting as a political matter because it creates an uneasy tension between respecting states’ taxing autonomy and the federal government’s interest in encouraging robust interstate commerce. Developing a policy position on this issue thus requires a difficult choice for many who are generally in favor of states’ rights. That tension has manifested itself in significant disagreement among House republicans on whether and how Congress should intervene. It has also pitted Republican governors against their peers in Congress. The President’s tweet could be a signal that he aligns himself with those in favor of allowing states more power in this area. Or it could just be a tweet intended to needle Bezos and The Washington Post. (My money is on the latter.)
Beyond the Tweet
Notwithstanding the silliness of this particular tweet, this issue is very meaningful for states and businesses doing commerce online. The Supreme Court has long restricted states from exercising their taxing authority over remote vendors. That goes back to a 1967 decision in National Bellas Hess v. Illinois in which the Court enunciated the so-called “physical presence rule.” The Court affirmed that rule as a Dormant Commerce Clause requirement in 1992, but has not spoken on the issue since that time. Congress, which can overturn that requirement, has also failed to take any action in the intervening 25 years.
Obviously, the rise of Internet commerce has magnified the impact of that rule on states, and many states are currently facing significant budget problems. That has caused states to challenge the rule in many ways, including by adopting legislation that is directly in conflict with the Court’s physical-presence mandate. For example, in 2016, South Dakota adopted a statute that requires vendors to collect the state’s tax if they either (1) have gross sales in South Dakota of more than $100,000 or (2) engage in more than 200 separate sales transactions with South Dakota customers in a calendar year. The statute was crafted specifically to get to the Supreme Court, and it is moving through the state courts at this time. Many other states have considered or enacted similar obligations.
Many hope that the Supreme Court will feel compelled to grant certiorari in this case after the South Dakota Supreme Court rules, but I’m only cautiously optimistic that it will do so. The Court has had the occasion to clarify its nexus doctrine on many occasions since 1992, but it has not shown an interest in doing so. (Admittedly, most of those cases involved the imposition of economic nexus standards for purposes of state income taxes rather than sales taxes, and the Court might be more inclined to get involved with respect to the latter.)
Fundamentally, the Court is in a tough position though—the physical presence rule is relatively straightforward, and Congress can overturn it if it wishes to do so. Further, unless the Court was prepared to give states completely unfettered taxing power, overturning the physical-presence rule would require the Court to replace it with something else. As we’ve recently learned, though, the difficulty with “repeal and replace” is that you must do the “replace” part. In this context, that would require the Court to create a test that better captures the essence of its Dormant Commerce Clause doctrine—restricting “undue burdens” on interstate commerce. That ultimately requires legislative judgment, which may be why the Court has been shy to intervene more fully to date. As long as states do not go too far, the Court can avoid that difficult task.
What about Congress?
Congress does have the power to act, and the Marketplace Fairness Act was recently reintroduced by a bipartisan group of senators. The bill has not fared well in the House in prior years, but it is unclear whether there is a path forward at this time. The House did just pass the Mobile Workforce Tax Simplification Act, which would restrict state power in the name of interstate commerce and business simplicity, but I don’t know that we can take much from that action. The stakes seem much different on the sales-tax side. Whether the House is prepared to act on that issue is thus to be determined. In the meantime, at least supporters of Marketplace Fairness can point to the President as being on their side…maybe.