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November 1, 2018

Taking a BAT to the Wayfair Decision


The U.S. Supreme Court in June handed down a decision in South Dakota v. Wayfair. At issue is whether there are limits on state taxing authority and whether such authority to tax and regulate extends across the internet. Unfortunately, the Court overturned the precedent that an entity must have a physical presence (nexus) in a taxing jurisdiction, such as a state or town, before it can be taxed or forced to collect taxes. As of now, taxation without representation is once again okay.
But remote sales taxes are just the beginning. The states pushing the Court to overturn the physical-presence standard for interstate commerce are just getting warmed up. Ultimately the real money is in income tax, both personal and business. That money will be the next target, and states going after it will chill the economy by increasing compliance and tax costs. These aggressive, tax-expansionist desires are already on display as some states are already trying to collect taxes going back months, well before the Court ruled.
Without a physical-presence requirement, government is unleashed from its traditional boundaries. Every level of government from mosquito abatement districts to state government could potentially reach across the internet, placing people under the thumb of multiple, conflicting taxes, audits and regulations. Such a world would make the most regulated jurisdictions in the country today look like havens of liberty by comparison.
The Court also noted in Wayfair that the proper place for decisions about requirements for taxing across state lines is Congress, not the courts. Fortunately, Congress is already thinking about how to restore the notion of taxation only with representation—i.e., restore a physical-presence standard, by simplifying business activity taxes (BAT).
U.S. Representative Steve Chabot recently introduced The Business Activity Tax Simplification Act, attracting bi-partisan support. The Act would allow states to impose a tax only on companies that have a meaningful state presence, such as employees, leases or property in the state. With clear rules, a company understands when and where it can expect to be taxed, submit to audits or collect and remit taxes, and can execute a business plan to drive growth rather than fear litigation. And consumers benefit because businesses can set prices based on known costs and risks, not a higher rate to hedge against unknown risks and taxation confusion.
In the ever-expanding online world that features so much intangible property, these determinations are all the more important. Such property often exists everywhere and nowhere at the same time, outside of artificial definitions designed only to provide government a means to regulate and tax. The mere presence of a customer or intangible property, the viewing of a website, a pop-up advertisement or the use of an internet service provider should not be enough to trigger a tax obligation.  
A “bright line standard” removing ambiguity about nexus should be adopted by Congress. Given the current, and historic, bi-partisan support in the House, that body should be able to move quickly by creating stability and certainty in the marketplace for remote sales today, and for all transactions tomorrow. The last time similar legislation was introduced in the Senate, it was by minority leader Senator Chuck Schumer. Combined, these facts seem to make the issue an attractive one for a Congress that rarely agrees on much.


  • TaxBytes-New

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