Washington, D.C. — House Judiciary Committee Chairman Bob Goodlatte (R-Va.) today delivered the following statement during the House Judiciary Committee’s hearing on “Examining the Wayfair Decision and its Ramifications for Consumers and Small Businesses.”
Chairman Goodlatte: Welcome to this hearing examining the Wayfair decision and its ramifications for consumers and small businesses.
On June 21, 2018, the Supreme Court reversed the longstanding rule that, under the Constitution’s Commerce Clause, the states may not impose sales tax collection duties on remote sellers with no physical presence in the taxing state.
The Court could have left resolution of this issue to Congress, to which the Commerce Clause grants the ultimate authority to regulate interstate commerce. But the Court said it was eliminating the bright-line physical-presence standard because it was wrong to “ask Congress to address a false constitutional premise of this Court’s own creation.”
This reasoning is exactly backwards. For most of American history, it was thought “a principle of universal application . . . that the statutes of one state have . . . no force or effect in another.” It was only with the New Deal that the courts began weakening the traditional safeguards against extraterritorial regulation to make way for big government.
Accordingly, the true judicial creation was not the physical-presence standard, but the relaxation of its strictures which were thought inherent for most of American history.
We are in a new world now.
The Court’s close and incomplete decision in Wayfair has the potential to unleash chaos for consumers and remote sellers, particularly small business sellers. There are over 10,000 sales tax jurisdictions, each with different rates, rules, exemptions, product definitions, thresholds for liability and the power to audit. Compliance software is, as the dissent noted, “still in its infancy, and its capabilities and expense are subject to debate.”
The potential costs of audits by thousands of jurisdictions could be “staggering.” The Government Accountability Office recently reported on the asymmetry between states’ low-cost enforcement tools, like letter audits, and the costs to small businesses that must often hire outside counsel to represent them in foreign jurisdictions.
Just as worrying, retroactive taxation remains a real threat. Already, six state jurisdictions have laws on the books with effective dates that look back as much as two years. Remote sellers could thus be held liable for sales taxes that they never collected from consumers, meaning the taxes would come out of the sellers’ pockets.
Just this morning, Bloomberg reported that “Rhode Island appears to be committed to retroactively enforcing its remote sales tax law.”
These are not just my fears. Compliance problems were front and center at a recent “emergency” meeting of states that participate in the Streamlined Sales and Use Tax Agreement. Topics included giving large online retailers more time to come into compliance. Other participants rejected that idea, saying it could invite lawsuits based on discrimination. Nor was there consensus among states as to whether a seller could lose the economic nexus sufficient to support tax liability after a period of time. In other words, a small online seller’s liability could ebb and flow constantly, creating a highly unstable compliance environment.
Another critical question at the meeting was how states will handle overseas sellers. As highlighted recently in the Atlantic Magazine, states cannot effectively enforce their tax laws against them. This effectively retains, exclusively for overseas sellers, the alleged tax subsidy afforded by the Supreme Court’s prior physical-presence rule, reducing the competitiveness of U.S. businesses.
Similarly, the Multistate Tax Commission has released a memo raising numerous technical questions that must be answered. For example, should tax-exempt sales count toward any small business thresholds? Do state thresholds for determining tax liability apply to local jurisdictions? Should states block class-action lawsuits for incorrect collection by retailers struggling to comply?
A senior official warned that retailers should not be getting different answers from different states.
With so many unanswered questions, both sellers and states need time to figure out how to proceed.
We need to also consider the ripple effects of removing the physical-presence standard in other areas of state taxation and regulation.
Practitioners told the Wall Street Journal that “states are more likely to take an aggressive approach on income taxes now that they have the Wayfair decision.”
That, in fact, has already begun. On July 12, 2018, Wells Fargo announced an earnings miss due, in part, to a $481 million charge for business activity taxes states may impose now that the physical-presence standard is gone.
Likewise, there are concerns that states will more aggressively tax things like financial transactions, streaming video and legal services. Even a state that disclaims these options today may change its view in a budget crunch.
Finally, what are the broader ramifications of the Wayfair decision for innovation? The Court acknowledged that “the physical presence rule has permitted startups . . . to use the Internet as a means to grow without exposing them to the daunting complexity and . . . obstacles of nationwide sales tax collection.” What does it mean for the e-commerce world that this barrier to entry now looms large?
It is imperative that Congress promptly assess these issues. Today’s panel of witnesses can provide a wide spectrum of views from those who will bear the burdens created by the Wayfair decision and those who are otherwise expert in identifying what those ramifications may include, to those who now have the authority to impose these burdens.
Once we hear from the witnesses, we will be in a better position to assess whether and how Congress should intervene, as is our prerogative, per the Wayfair decision.
I thank our witnesses for being physically present today, and I look forward to the discussion.