Note to Congress: About that Internet sales tax thing, stand down. You are irrelevant. The train has left the station and neither the states nor many retailers want you on board. There are still some issues to be addressed, but so far they are being resolved by state governments.  

According to the Tax Foundation’s Joe Bishop-Henchman and colleagues, nearly half the nation’s sales tax states have adopted legislation or regulations that will require remote sellers to either collect sales taxes or report transactions to state revenue authorities (increasing incentives for consumers to pay the tax themselves).

Seven states already are imposing the new rules on out-of-state online and catalogue sellers and ten will start on Oct 1. Two others will require collections or reporting later this year, and four will do so starting on Jan 1, 2019. States not only are beginning to collect the tax, they even are deciding how to spend the money—mostly by reducing sales or other tax rates.   

The backstory

The biggest remaining uncertainty is what several of the largest states will do. California, New York, Texas, Maryland, Florida, and Ohio have yet to act but are likely to do so once their legislatures return in January.

You probably know the backstory by now. Twenty-six years ago, the US Supreme Court ruled in Quill Corp. V North Dakota that states could require remote retailers to collect sales tax from their residents only if the sellers had a physical presence such as a warehouse or retail store in the state. At the same time, the High Court urged Congress to establish national ground rules for state taxation of such transactions.

But Congress, as it is wont to do, failed to act. It created an independent commission that wrote a report that is gathering dust on someone’s bookshelf. While the Senate passed a consensus bill called the Marketplace Fairness Act, a few powerful House Republicans blocked action for years.

This June, the Supreme Court upended the issue when it concluded that it had wrongly decided Quill. In South Dakota v. Wayfair, the High Court said states could require collections by remote sellers whether they maintained a physical presence in their jurisdiction or not.

Following the roadmap

The justices imposed some constraints on collections but also provided something of a roadmap for states to follow. States could safely require collections as long as they do not do so retroactively, exempt firms that “transact only limited business” in the state, establish single state-level administration of the tax, and simplify and harmonize state and local sales taxes.

Sales tax states, in anticipation of that decision, already had begun adopting legislation that would allow them to require active online sellers to collect. But once the Court ruled, the dam broke.

I got a hint of where that left Congress when I spoke to Sen. Heidi Heitkamp (D-ND) at a June Tax Policy Center event on the Wayfair decision. Heitkamp, who brought Quill to the Supreme Court as North Dakota’s revenue commissioner, had been a strong advocate for congressional action. But when I asked her if Congress would move post-Wayfair, she was decidedly cool. States, she said, should be given a chance to work out the details for themselves.

And states, eying a new source of revenue, pounced.

Creating a fait accompli

For years, they had quietly been working towards some of the administrative goals finally endorsed this spring by the High Court. Their vehicle: a voluntary organization built on an initiative called the Streamlined Sales Tax and Use Agreement.       

By meeting that group’s standards, a state can comply with five of the seven items on the Supreme Court’s checklist, making it relatively easy to impose the collection requirement.   

Interestingly, not only are states acting rapidly to make online collections a fait accompli, but many retailers seem fine with the effort.  At one recent event, Jason Brewer, Executive Vice President of Communications & State Affairs at the Retail Industry Leaders Association said, “There is… probably near-universal agreement that Congress should not address this at this point.” The RILA is a trade group that represents many large retailers, including those with both an online and a brick-and-mortar presence.

Brewer warned that if states overreach in implementing remote sales tax collections, his group and others could ask Congress to set uniform national standards. But for now, even many retailers are OK with leaving the rules of the road to the states.

Congress could have resolved this issue decades ago, clarifying the taxation of online sales for both consumers and retailers, and generating some much-needed revenue for states. But by ducking the issue for so long, Congress gave the Supreme Court time to change its mind. Now, the great online sales tax controversy seems largely settled.