Statement of Judiciary Committee Chairman Lamar Smith Full Committee Hearing on Constitutional Limitations on States' Authority to Collect Sales Taxes in E-Commerce

Statement of Judiciary Committee Chairman Lamar Smith
Full Committee Hearing on
Constitutional Limitations on States’ Authority to Collect Sales Taxes in E-Commerce

Chairman Smith: Black Friday marks the unofficial beginning of the holiday shopping season.  But over the past few years, many Americans have begun to wait until the Monday after Thanksgiving to shop. 

On “Cyber Monday,” online merchants offer deals similar to the promotions shoppers find in brick-and-mortar stores on Black Friday with one exception—online merchants usually do not collect a sales tax.

The Constitution grants Congress the exclusive power to regulate interstate commerce.  By negative inference, a state may not unduly burden interstate commerce—a constitutional principle commonly referred to as the “dormant commerce clause.” 

As applied to state tax policy, the dormant commerce clause prohibits a state from taxing a person with whom it lacks a “substantial nexus.”  In tax terminology, “nexus” refers to the relationship between the taxing authority and the taxpayer.  

In its 1992 decision in Quill Corporation vs. North Dakota, 19 years ago, the Supreme Court held that, at least for purposes of collecting sales tax, a state lacks substantial nexus over a taxpayer that has no physical presence in the state.  The Quill court thus established a bright-line physical presence rule for sales tax nexus.

In the Quill Decision, the Supreme Court was concerned with burdens to America’s small businesses.  It reasoned that without a bright-line physical presence rule for nexus, thousands of state and local taxing jurisdictions across America—each with their own unique tax bases and rates—would use vague concepts like “economic nexus” to impose sales tax collection requirements on businesses. 

In the courts view, uncertainty about what jurisdiction has power to tax, as well as compliance with numerous and difficult tax policies, would place an undue burden on interstate commerce.

Today we will hear testimony from online retailers, brick-and-mortar retailers, and state governments about the impact of Quill on their operations. 

This hearing will explore two issues:  First, whether Congress should exercise its Commerce Clause power to enact sales tax reform legislation.  And second, if Congress should act, how we can do so in a manner that does not increase administrative and compliance burdens on America’s small businesses.

Some in the online retail community believe that physical presence is a fine rule for sales tax nexus.   Online retailers typically maintain physical presence in only a handful of states and rely on common carriers to transport purchased goods to customers. 
Most states therefore cannot require those online retailers to collect and remit sales tax.  Some argue that shielding businesses from the complex patchwork of sales tax laws was precisely the benefit of Quill and that Congress should take no action.

But it is precisely this reality that frustrates brick-and-mortar retailers, who claim to suffer a competitive disadvantage compared to their online counterparts. 

State revenues are also affected by the Quill rule.  Forty-five states and the District of Columbia have a sales tax.  Those jurisdictions also have a “use” tax, equal to the sales tax rate, which residents must pay for the usage, consumption or storage of goods purchased in a non-resident state and brought into the resident state. 

For example, a shopper in Austin, Texas who buys goods online from a retailer that lacks a physical presence in Texas is responsible to pay Texas use tax even though he pays no sales tax on his transaction.

But states rely on taxpayers to self-report their purchases in other states, and states lack the resources and means to effectively police use tax avoidance.  So online purchases usually escape taxation altogether. 

Some believe that Congress should not come to the states’ assistance—if a state chooses to impose a use tax, it should also find a way to enforce it.  Others would like to see Congress help states collect sales taxes on all transactions, thereby eliminating the need for use taxes.

I am aware of three legislative proposals that could give states nexus over online and other remote sellers. 

Ranking Member Conyers has re-introduced the Main Street Fairness Act this Congress.

Representatives Steve Womack and Jackie Speier have introduced the Marketplace Equity Act.  And most recently, Senators Enzi and Durbin introduced the Marketplace Fairness Act.  Although this is an oversight hearing, I invite our witnesses to comment on any of these three bills.