Providing Small Business Relief from Remote Sales Tax Collection (U.S. Senate Committee on Finance, Subcommittee on Fiscal Responsibility and Economic Growth)

Hearing	Providing Small Business Relief from Remote Sales Tax Collection
Committee	U.S. Senate Committee on Finance, Subcommittee on Fiscal Responsibility and Economic Growth
Date	September 25, 2024

 

Hearing Takeaways:

• The U.S. Supreme Court’s South Dakota v. Wayfair, Inc. Decision: The hearing focused on the impact of the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision on remote sellers. This decision held that states may require remote sellers to collect and remit sales taxes to states and localities, even if the remote sellers do not have a physical presence within such states. Subcommittee Ranking Member Charles Grassley (R-IA) noted that while the decision suggests that there exist constitutional limits on the ability of states to impose taxes on remote sellers, he commented that there remain many uncertainties stemming from the decision.
• The Streamlined Sales and Use Tax Agreement (SSUTA): Subcommittee Members and the hearing’s witnesses discussed how the Streamlined Sales Tax Governing Board (SST) has established the SSUTA to provide a framework for state sales tax uniformity and standardization. The SSUTA is meant to facilitate sales tax collection and remittance for remote sellers. There are currently 24 states and over 29,000 active sellers participating in the SSUTA. Subcommittee Ranking Member Charles Grassley (R-IA), Mr. Bishop-Henchman, and Mr. Johnson lamented however that no new states have joined the SSUTA since the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision. Ms. Yetter called on Congress to encourage more states to participate in the SSUTA as either full SST members or through the SSUTA’s existing programs. These programs include centralized registration, the Certified Service Provider (CSP) program, and centralized information disclosures.
  • The SST’s CSP Program: One key feature of the SSUTA is its CSP Program, which provides free or low-cost software to remote sellers to support their fulfillment of sales tax collection and remittance obligations. Under the CSP Program, the SST contracts with third-party software providers (known as CSPs) that must provide tax calculations, tax collections, tax return preparations, and tax return filings on behalf of sellers. The SST maintains a vetting process for CSPs to ensure that these software providers can sufficiently collect and remit sales taxes on behalf of remote sellers. Any business that uses CSP Program software is generally immune from audit liability for the sales that they process through the software. Of note, CSPs are allowed to keep a percentage of the tax that they calculate, collect, and remit from the remote sellers for compensation. Neither states nor sellers send money directly to CSPs. Subcommittee Members, Mr. Bishop-Henchman, and Mr. Johnson expressed support for the CSP Program. Ms. Yetter testified however that three of her clients are sellers that qualify for free tax software under the CSP program and still incur costs related to software and filing tax returns. She stated that Congress should explore additional efforts to support remote sales tax collection beyond programs that provide free software. She indicated that these efforts could include a federal tax credit and direct funding to sellers from the states at higher amounts than are currently being provided.
  • Centralized Registration and Filing: Ms. Yetter highlighted how the SST offers centralized registration for remote sellers and commented that this centralized registration significantly reduces registration burdens for small businesses. She explained that the SST’s registration process enables small businesses to file their tax registration forms with the 24 SST member states with very few questions. She noted however that other states maintain registration applications that are nearly 25 pages in length and contain very invasive questions. Subcommittee Chairman Maggie Hassan (D-NH) expressed support for the creation and adoption of centralized filing portals to support remote sellers in satisfying their sales tax collection and remittance obligations.
  • Activities from Non-SST Member States to Facilitate Sales Tax Collection and Remittance for Remote Sellers: The hearing’s witnesses also highlighted how several non-SST member states are engaged in activities to support remote sellers in their sales tax collection and remittance efforts. Mr. Bishop-Henchman and Mr. Johnson highlighted how Texas (which is a non-SST member state) permits remote sellers to either collect and remit sales taxes for all of Texas’s 1,600 local sales tax jurisdictions or use one single tax rate that is the average of the rate for all of these jurisdictions. Texas maintains responsibility for collecting and remitting the sales taxes to local jurisdictions if the remote seller chooses the second option. Mr. Johnson also mentioned how several non-SST member states have adopted some of the SSUTA’s uniform definitions and uniformity provisions related to exemptions. Mr. Johnson further noted how Pennsylvania had adopted its own CSP program that resembles the SST’s CSP program. He commented however that Pennsylvania’s CSP program is not as robust as the SST’s CSP program.
• Current Remote Sales Tax Collection and Remittance Challenges and Policy Proposals: Subcommittee Members and the hearing’s witnesses discussed how remote sellers (and particularly small remote sellers located in states without sales taxes) face various challenges collecting and remitting sales taxes to states and localities throughout the U.S. Subcommittee Chairman Maggie Hassan (D-NH) stated that the U.S. sales tax landscape is so complex that tax experts cannot agree on the U.S.’s precise number of state and local tax jurisdictions. She noted how estimates regarding the total number of state and local sales tax jurisdictions range between 10,000 jurisdictions and 12,000 jurisdictions. Subcommittee Members and the hearing’s witnesses also proposed various solutions to support remote sellers in complying with state sales tax collection and remittance requirements.
  • Variations in Tax Definitions: Subcommittee Members and the hearing’s witnesses raised concerns over how states and localities can maintain different tax definitions for the same products. They stated that these different definitions can make it challenging for remote sellers to comply with remote sales tax collection and remittance requirements. Subcommittee Chairman Hassan, Mr. Johnson, and Ms. Yetter highlighted how the SST has worked with its 24 member states to develop uniform product definitions to facilitate remote seller compliance with sales tax collection and remittance requirements. Mr. Johnson testified that SST works to develop “clear and concise” definitions with “bright line” tests. He acknowledged that while the SST’s definitions might have some oddities, he emphasized that these definitions are meant to be fully objective so that businesses can easily comply with them Ms. Yetter noted however that these uniform product definitions are not available in non-SST member states. Mr. Bishop-Henchman and Ms. Yetter also expressed support for efforts to make tax information readily accessible and clear for all sellers. They commented that the SST’s taxability matrices (which provide clear guidance to remote sellers regarding the taxability of items) should serve as a model for these efforts.
  • Variations in Tax Filing Requirements: Subcommittee Members, Mr. Bishop-Henchman, and Ms. Yetter discussed how states and localities vary heavily in terms of the ease of their tax return filing systems. Ms. Yetter noted how some states (such as Massachusetts) have easy tax filing requirements, she mentioned how other states (such as California, Illinois, and Texas) have more complex tax filing requirements. Subcommittee Members expressed support for simplifying the paperwork requirements related to sales tax collection and remittance for remote sellers. Mr. Bishop-Henchman also noted how seller exemption certificate requirements for proof of wholesale sales can vary across states, even though these certificates tend to require similar types of information. He stated that the adoption of a single uniform exemption certificate form could reduce paperwork burdens for remote sellers.
  • Compliance Costs: Subcommittee Members and Mr. Bishop-Henchman raised concerns over the compliance costs that state remote sales tax collection and remittance requirements impose on small businesses. These compliance costs include annual software licenses, registration fees, tax filing fees, accounting fees, and legal advice. Mr. Bishop-Henchman raised particular concerns that a small number of states can inflict significant damage on the national economy through imposing onerous sales tax collection and remittance requirements on remote sellers.
  • Non-Compliance Concerns: Mr. Bishop-Henchman raised concerns that many small businesses are currently avoiding compliance with remote sales tax collection and remittance requirements. He noted how the six years following the South Dakota v. Wayfair, Inc. decision has been a period of “flush state budgets” and commented that states have had little motivation to aggressively enforce non-compliance with remote sales tax collection and remittance policies. He predicted however that states would increase their enforcement of remote sales tax collection and remittance policies during the next period of state revenue shortfalls. He warned that many remote sellers would face challenges in this scenario and that Congress would be limited in its ability to provide relief to these businesses with short notice. Mr. Johnson remarked that the state adoption of the SST’s measures would likely improve seller compliance with remote sales tax collection and remittance obligations. He stated that SST member states have recognized that making compliance with remote sales tax collection and remittance laws simpler would lead to greater voluntary compliance, which would in turn result in higher tax revenue collections.
  • Need for Precise Remote Sales Tax Calculations: Mr. Bishop-Henchman further discussed how retailers have no margin for error in collecting sales taxes. He elaborated that the under collection of sales taxes will cause retailers to be subject to audits and penalties and that the overcollection of sales taxes will cause retailers to be subject to class action lawsuits from customers. He commented that this dynamic demonstrates the importance of providing sellers with precise sales tax collection and remittance guidance.
  • Prohibitions on Retroactive Sales Tax Collection: Subcommittee Ranking Member Charles Grassley (R-IA) and Mr. Bishop Henchman remarked that while all states have banned retroactive collection of remote sales taxes in principle, they raised concerns that multiple have tried or are currently trying to enforce pre-South Dakota v. Wayfair, Inc. decision laws and regulations to effectively achieve retroactive sales tax collection. Subcommittee Ranking Member Grassley commented that these states are effectively seeking to retroactively collect sales taxes from retailers that previously lacked legal obligations to collect and remit sales taxes prior to the South Dakota v. Wayfair, Inc. decision.
  • State Safe Harbor Provisions: Subcommittee Chairman Hassan, Mr. Bishop-Henchman, and Ms. Yetter expressed interest in the adoption of state safe harbor provisions that exempt certain remote sellers from sales tax collection and remittance requirements. These safe harbor provisions generally involve setting a sales dollar amount and/or number of sales thresholds for triggering compliance with such requirements. Chairman Hassan and Ms. Yetter raised concerns however that larger states often maintain dollar thresholds for triggering sales tax collection and remittance requirements that are too low.
  • Physical Presence Standards: Ms. Yetter further raised concerns that many remote sellers are subject to sales tax collection and remittance requirements through “archaic” physical presence standards. She elaborated that sellers that hold inventory in a state, have a remote employee in a state, or have attended a tradeshow in a state can trigger physical presence in the other state and thus be subject to sales tax collection and remittance requirements. She asserted that the elimination of the physical presence standard for sales tax collection and remittance would remove the confusion and uncertainty sellers face in determining where they are required to collect and remit taxes. She also commented that the elimination of the physical presence standard would reduce retroactive liabilities for sellers.
  • Subcommittee Chairman Hassan’s Legislative Discussion Draft: Subcommittee Chairman Hassan highlighted how she had just released a legislative discussion draft that seeks to provide remote sales tax collection and remittance compliance relief to all small businesses, regardless of whether the small businesses are dealing with a state participating in the SSUTA. She indicated that this legislative discussion draft includes requirements for states to adopt simple and transparent tax rates with nationally consistent product definitions. She also noted that this legislative discussion draft would require governments to provide remote businesses with no-cost compliance services if state governments require these remote businesses to collect and remit their sales taxes. She commented that these provided compliance services should include free software and third-parties that serve as intermediaries with auditors. She added that state governments should provide these remote businesses with protections from penalties for sales tax mistakes made by software or other third-parties.

Hearing Witnesses:

1. Mr. Joseph Bishop-Henchman, Executive Vice President, National Taxpayers Union Foundation
2. Mr. Craig Johnson, Executive Director, Streamlined Sales Tax Governing Board
3. Ms. Diane L. Yetter, President and Founder, Sales Tax Institute

Member Opening Statements:

Subcommittee Chairman Maggie Hassan (D-NH):

• She remarked that the hearing would examine ways to provide relief to small businesses following the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision.
• She explained that the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision requires small businesses to collect and remit sales taxes for remote sales to other state and local tax jurisdictions.
  • She highlighted how there does not exist a consensus regarding the total number of state and local jurisdictions within the U.S. and indicated that estimates for this number range between 10,000 jurisdictions and 12,000 jurisdictions.
• She remarked that these state and local tax jurisdictions can have “vastly different” sales tax rules, including different tax rates for the same product, different definitions of the same product, and different paperwork filing requirements for sales of the same product.
• She mentioned how a New Hampshire business owner had testified before the Committee in 2022 that their business now spends $50,000 annually to collect sales taxes for 1,500 out-of-state governments.
  • She noted how these compliance costs include annual software licenses, registration fees, tax filing fees, accounting fees, and legal advice.
• She stated that while remote sales tax collection and remittance requirements have especially harmed small businesses in states without sales taxes (such as her state of New Hampshire), she noted how all U.S. small businesses must comply with remote sales tax collection and remittance requirements.
• She highlighted how over 60 small businesses representing 28 states with sales taxes had just sent a letter to Congressional leadership calling for relief from remote sales tax collection and remittance requirements.
  • She called on Congress to take action to alleviate the compliance burdens for small businesses associated with remote sales tax collection and remittance requirements.
• She remarked that Congress should require states to increase the simplicity and consistency of their sales tax laws for remote sellers.
  • She commented that these requirements should include simple and transparent tax rates within every state and consistent definitions of products across states.
• She also stated that Congress should ensure that state sales tax paperwork is as simple as possible for remote businesses.
  • She suggested that this could be accomplished through standardized forms across states and centralized filing portals.
• She further asserted that state governments should provide remote businesses with no-cost compliance services if the state governments require remote businesses to collect and remit their sales taxes.
  • She commented that these provided compliance services should include free software and third-parties that serve as intermediaries with auditors.
  • She added that state governments should protect remote businesses from penalties for sales tax mistakes made by software or other third-parties.
• She remarked that the aforementioned issues are reflected within her recently released legislative discussion draft and commented that this discussion draft would cut remote sales tax collection and remittance burdens for small businesses.
  • She expressed interest in working with Senate colleagues to develop legislation regarding this issue.

Subcommittee Ranking Member Charles Grassley (R-IA):

• He remarked that the hearing would address the unresolved remote sales tax collection and remittance issues stemming from the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision.
  • He noted how the U.S. Supreme Court’s previous precedents had barred states from compelling online retailers to collect sales taxes on out-of-state sales for most of the internet’s history.
• He discussed how Congress had long considered whether to exercise its power under the U.S. Constitution’s Commerce Clause to grant states the authority to require internet sellers to collect and remit sales taxes for out-of-state sales.
  • He noted how states with sales taxes have argued that growing online sales threaten their revenue streams (which are needed to fund critical government functions).
  • He also noted how small online retailers have argued that the burden and cost of complying with sales tax rules in thousands of state and local tax jurisdictions would be “crippling.”
• He recounted how former Sen. Mike Enzi (R-WY) had proposed the Marketplace Fairness Act, which would have granted states the authority to collect sales taxes from online retailers.
  • He indicated however that this legislation would have only permitted such collection if the states joined the SSUTA or adopted certain rules designed to minimize compliance costs and protect small businesses.
• He then mentioned how the U.S. Supreme Court had rendered its South Dakota v. Wayfair, Inc. decision in 2018, which had effectively granted states the right to compel online retailers to comply with state and local sales tax rules.
  • He noted that while the decision suggests that there exist constitutional limits on the ability of states to impose taxes on remote sellers, he commented that there remain many uncertainties stemming from the decision.
• He remarked that Congress must now consider whether federal rules are necessary to minimize sales tax collection and remittance compliance burdens for remote sellers or to provide guidance to states on remote sales tax collection and remittance policies.
• He discussed how his state of Iowa is a SSUTA member and has voluntarily implemented reforms to facilitate and simplify compliance for online retailers selling into Iowa.
  • He noted however that only 24 of the 45 states with a general sales and use tax have joined the SSUTA and that no states have joined the SSUTA since the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision in 2018.

Witness Opening Statements:

Mr. Joseph Bishop-Henchman (National Taxpayers Union Foundation):

• He mentioned how the U.S. Supreme Court had cited three features of South Dakota’s remote sales tax collection law as laudable when it had rendered its South Dakota v. Wayfair, Inc. decision.
  • He indicated that these three features were a safe harbor protecting those that transact limited business within the state, a ban on retroactive collection, and membership in the SSUTA.
• He also highlighted how the five U.S. Supreme Court Justice majority in the South Dakota v. Wayfair, Inc. decision had invited Congress to legislate further on remote sales tax collection and remittance issues.
  • He mentioned how the remaining four U.S. Supreme Court Justices had asserted that only Congress should act to address these issues.
  • He commented that all of the U.S. Supreme Court Justices in this decision had thus called on Congress to address these issues.
• He noted however that Congress has not taken action to address remote sales tax collection and remittance issues in the years following the South Dakota v. Wayfair, Inc. decision.
• He discussed how many states have safe harbor provisions meant to protect small businesses from sales tax collection and remittance requirements.
  • He highlighted how 22 states merely have a dollar threshold for triggering sales tax collection and remittance requirements, which he described as the “gold standard” in protecting high-volume, low-dollar sellers.
• He stated however that while all states have banned retroactive collection of remote sales taxes in principle, he asserted that revenue officials in six states have tried or are currently trying to enforce pre-South Dakota v. Wayfair, Inc. decision laws and regulations to effectively achieve retroactive sales tax collection.
• He further lamented how just 24 states are members of the SSUTA and noted how remote sellers in the other 22 non-SSUTA states are required to collect and remit sales taxes without the SSUTA’s benefits of uniformity, simplification, and standardization.
  • He highlighted how SSUTA members receive these benefits and reiterated that the U.S. Supreme Court had cited these benefits favorably in its South Dakota v. Wayfair, Inc. decision.
• He noted how many non-SSUTA states do not provide access to tax rate lookup software for businesses, do not adhere to uniform definitions of products, do not recognize exemption certificates from other states, and do not offer centralized registration and filing for all of the jurisdictions within their states.
• He remarked that these different state policies create separate and duplicative procedures, which he called problematic for small businesses.
  • He commented that it is costly for small businesses to send the same information 46 different ways to 46 different states.
• He mentioned how his organization, the National Taxpayers Union Foundation, had estimated in 2022 that nearly 50,000 businesses nationwide are not complying with state remote sales tax collection and remittance policies and are risking enforcement actions.
  • He also mentioned how the U.S. Government Accountability Office (GAO) had noted research indicating that a majority of remote sellers are not complying with these policies.
• He noted how the six years following the South Dakota v. Wayfair, Inc. decision has been a period of “flush state budgets” and commented that states have had little motivation to aggressively enforce non-compliance with remote sales tax collection and remittance policies.
• He predicted however that states would increase their enforcement of remote sales tax collection and remittance policies in the event of future state revenue shortfalls.
  • He warned that many remote sellers would face challenges in this scenario and that Congress would be limited in its ability to help these businesses with short notice.
• He then expressed support for the Subcommittee’s consideration of the SSUTA and stated that the SSUTA creates a framework for uniformity and standardization that eases compliance burdens while respecting state sovereignty.
  • He asserted that all states should join the SSUTA.
• He remarked that states that do not wish to join the SSUTA should demonstrate that they have taken actions to reduce sales tax-related compliance costs.
  • He highlighted how Texas (which has not joined the SSUTA) allows remote sellers to either collect and remit sales taxes for all of the state’s 1,600 local sales tax jurisdictions or use one single tax rate that is the average of the rate for all of these jurisdictions.
  • He indicated that Texas is responsible for collecting and remitting the sales taxes to local jurisdictions if the remote seller chooses the second option.
• He also stated that federal legislation to address remote sales tax collection and remittance could build upon state policies in this area.
  • He elaborated that federal legislation could include eliminating transaction thresholds from safe harbor policies, prohibiting retroactive collections, and aligning local sales tax rules with state sales tax rules.
• He warned that a small number of states that have pursued their own unique sales tax collection and remittance policies can inflict enormous damage on the national economy through imposing outsized compliance burdens.
• He stated that while the legal and policy environment prior to the South Dakota v. Wayfair, Inc. decision was unfair to brick and mortar businesses and states, he asserted that Congress must now ensure that the post-South Dakota v. Wayfair, Inc. decision environment does not reward bad sales tax administration practices.
  • He commented that Congress should seek to provide an easier sales tax collection and remittance apparatus for all parties.

Mr. Craig Johnson (Streamlined Sales Tax Governing Board):

• He discussed how his organization, the SST, is composed of 24 member states that are committed to providing sales tax simplification and uniformity for all sellers while also respecting state sovereignty.
  • He commented that SST member states have implemented “many changes” to their sales and use tax laws to assist remote sellers in complying with the remote sales tax collection and remittance requirements of each state.
• He remarked that SST represents a successful collaboration between states, local governments, and the business community that simplifies sales tax systems for all sellers nationwide.
  • He commented that the SSUTA provides a blueprint for all states to substantially reduce tax compliance burdens for all sellers (including remote sellers).
• He noted how SST member states have developed the CSP program to reduce compliance burdens for sellers that lack a physical presence within a state.
  • He also mentioned how these states have developed a compensation program that allows both small and large remote sellers the same opportunity to participate in the CSP program at little to no cost because SST member states fully compensate the CSPs.
• He stated that the CSP program has been operating successfully in the SST member states for over 18 years and was designed specifically to address the needs of remote sellers.
• He then discussed some of the key uniformity provisions that the U.S. Supreme Court had recognized in its South Dakota v. Wayfair, Inc. decision and some other provisions that have been implemented in SST member states.
  • He noted how the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision had highlighted South Dakota’s single state-level administration of state and local taxes imposed, uniform definitions for products and services, and simplified state and local tax rate structures.
  • He also noted how SST member states provide a free and simple online registration system that any seller can use for any or all of SST member states, taxability matrices that indicate what is taxable or exempt in each state, uniform exemption rules, and numerous disclosed practices to provide remote sellers with answers related to their remote sales tax collection and remittance obligations.
• He then discussed how GAO had provided recommendations in a 2022 report on remote sales tax collection that could be implemented on a state-by-state, multiple state, or nationwide basis.
• He testified that SST member states have already implemented many of the GAO’s recommendations for remote sales tax collection.
  • He indicated that these implemented recommendations include centralized administration, single state-wide tax base and rates, free or reduced cost of software for remote sellers, and uniform definitions.
• He stated that SST had worked for over 15 years to obtain Congressional approval for remote sales tax collection authority and noted how South Dakota had obtained the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision following this Congressional inaction.
  • He called on Congress to recognize that SST member states have been “doing the right thing” since this decision through continuing to work with the business community on developing solutions to remote sales tax collection and remittance challenges.
• He then testified that over 29,000 active sellers are currently registered through the SST program and indicated that this number continues to increase by between 200 and 400 sellers every single month.
• He stated that SST member states have developed various materials to make remote sellers aware of and remove the burdens associated with compliance with remote sales tax collection and remittance requirements.
  • He indicated that these materials are freely available on SST’s website.
• He concluded that SST member states will continue to work with the business community and implement remote seller sales tax collection authority granted under the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision in a “fair and reasonable” manner.

Ms. Diane L. Yetter (Sales Tax Institute):

• She expressed her support for the adoption of rules that would result in equitable sales tax collection responsibilities for sellers.
• She remarked that sellers should be able to easily determine the correct sales tax amounts to collect from customers.
  • She commented that states need to make taxability rules, rates, and boundaries clear, accessible, understandable, and fair.
• She also stated that the determination of undue burden should not be limited to only remote sellers.
  • She asserted that no sellers (including those with retail operations within a state) should incur an undue burden to act as tax collection agents on behalf of states.
• She further remarked that Congress, the SST, and all states can further reduce burdens on businesses.
• She then discussed how an inherent challenge associated with state sales taxes is that each state decides what their tax base will include and their applicable tax rates.
  • She expressed support for the rights of states to make these decisions.
• She stated however that the most significant burden facing remote sellers is understanding how states define or classify items and determining how these items are taxed.
  • She asserted that remote sellers should not have to guess the tax rate or taxability that applies to their transactions.
  • She posited the example of a Twix chocolate bar and noted how the categorization of the Twix chocolate bar as either a candy or grocery item has significant tax implications.
• She then remarked that many sellers do not actually qualify as remote sellers because these sellers have some sort of physical presence in some (if not many) states.
• She stated that the elimination of the physical presence standard for sales tax would remove the confusion and uncertainty sellers face in determining when they are required to collect and remit sales taxes.
  • She also commented that the elimination of the physical presence standard would reduce retroactive tax liabilities for sellers.
• She mentioned how she has worked with many sellers that did not realize that inventory held at Amazon warehouses triggered physical presence (and thus made them responsible for collecting and remitting state sales taxes).
  • She testified that one of her clients is facing a $1.6 million liability related to state sales tax collections and is considering shutting down their business to avoid this liability.
• She then discussed how the cost for sellers to serve as tax collection agents for states is continuing to grow due to the complexity of multistate registration.
  • She testified that three of her clients are sellers that qualify for free tax software under the SST’s CSP program and noted how these sellers still incur costs related to software and filing tax returns.
  • She also noted that these costs are in addition to their internal costs and fees paid to her accounting firm to manage their sales tax obligations.
• She stated that Congress should explore additional efforts to support remote sales tax collection beyond programs that provide free software.
  • She indicated that these efforts could include a federal tax credit and direct funding to sellers from the states at higher amounts than are currently being provided.
• She remarked that while the SST has made “great strides” in helping to address remote sales tax collection and remittance issues, she asserted that the SST can take additional actions with Congress and states to further reduce burdens on businesses.
  • She first called for all states to make tax information readily accessible and clear for all sellers and commented that the SST’s taxability and disclosed practice matrices could serve as a model for these efforts.
  • She secondly called on Congress to encourage more states to participate in the SST as either full members or through SST’s existing programs (such as centralized registration, the CSP program, and centralized information disclosures).
  • She thirdly called for SST member states to support and/or require uniform nexus thresholds and expansions of common definitions and centralized administrative functions.
  • She lastly called for the elimination of the “archaic” physical presence nexus standards and the adoption of more uniform economic thresholds, which she commented would reduce registration requirements for the smallest businesses.

Congressional Question Period:

Subcommittee Chairman Maggie Hassan (D-NH):

• Chairman Hassan noted how there exist between 10,000 and 12,000 state and local tax jurisdictions within the U.S. She commented that the U.S. sales tax landscape is so complex that tax experts cannot agree on the U.S.’s precise number of state and local tax jurisdictions. She asked Mr. Bishop-Henchman to explain why the U.S.’s state and local tax landscape is so complex. She also asked Mr. Bishop-Henchman to address how this complexity impacts small businesses.
  • Mr. Bishop-Henchman recounted how the National Taxpayers Union Foundation had represented jewelry components manufacturer Halstead Bead in its litigation challenging Louisiana’s remote sales tax collection policy. He noted how Halstead Bead is a low-dollar and high-volume seller that wants to comply with Louisiana’s remote sales tax collection policy. He mentioned how Halstead Bead’s calculations indicate that the company has spent $2.64 in compliance costs for every $1 the company had collected in state and local sales taxes. He noted how Halstead Bead had been required to register with 64 different parishes in Louisiana and file up to 750 tax returns in Louisiana in a single year after the company had made 200 sales within the state (including non-taxable wholesale sales). He described this situation as “unfortunate” and stated that these tax compliance burdens distract Halstead Bead from creating jobs and innovative products. He noted that while the National Taxpayers Union Foundation is preparing additional lawsuits to challenge cumbersome state remote sales tax collection and remittance policies, he called it impractical to assume that ligation alone can solve this problem.
• Chairman Hassan then remarked that there exists a misconception that the burdens associated with collecting and remitting out-of-state sales taxes only impacts small businesses located in states without sales taxes. She stated that there exist businesses in every state that are struggling with the costs associated with out-of-state sales tax collection and remittance. She asked Mr. Bishop-Henchman to elaborate on the remote sales tax collection and remittance challenges that small businesses located in states with sales taxes face. 
  • Mr. Bishop-Henchman remarked that the challenges that small businesses located in states with sales taxes face are the same as the challenges faced by small businesses located in states without sales taxes. He stated that most businesses could manage the burdens associated with remote sales tax collection and remittance if their out-of-state business is confined to one state. He remarked however that complexity arises when a small business must comply with remote sales tax collection rules for over 10,000 state and local tax jurisdictions.
• Chairman Hassan then discussed how small businesses can face significant challenges identifying, preparing, and filing the appropriate paperwork with state and local tax jurisdictions. She asked Ms. Yetter to discuss the compliance costs that small businesses face in filing out-of-state sales tax paperwork. She also asked Ms. Yetter to discuss how centralized tax filing portals and standardized forms help to address these challenges.
  • Ms. Yetter remarked that centralized registration (which the SST offers) significantly reduces registration burdens for small businesses. She explained that the SST’s registration process enables small businesses to file their tax registration forms with the 24 SST member states with very few questions. She noted however that other states maintain registration applications that are nearly 25 pages in length and contain very invasive questions. She also discussed how states vary heavily in terms of ease of filing tax returns. She noted how some states (such as Massachusetts) have easy tax filing requirements, she mentioned how other states (such as California, Illinois, and Texas) have more complex tax filing requirements. She added that these taxes must be filed on a monthly basis with the remote states. She stated that while software can help reduce these tax filing costs, she noted that not all small businesses have such software.
• Chairman Hassan commented that her legislative discussion draft seeks to reduce paperwork burdens for small businesses through providing centralized tax filing opportunities. She then remarked that the 24 SST member states have taken significant actions together to improve the consistency of the sales tax rules across states. She specifically highlighted how these states have worked together to standardize product definitions. She asked Mr. Johnson to explain how standardized product definitions reduce sales tax compliance challenges for small businesses. She also asked Mr. Johnson to discuss how the SST has worked with states and the business community to improve the interstate consistency of these definitions.
  • Mr. Johnson called uniformity of product definitions “extremely important” for businesses of all sizes. He noted that while many states had previously used the same terms and definitions, he indicated that these states would interpret the terms differently. He stated that the SST has worked with the business community to identify terms that require standardized definitions. He commented that the business community is best positioned to identify terms where varying interpretations exist across states. He testified that SST works to develop “clear and concise” definitions with “bright line” tests. He acknowledged that while the SST’s definitions might have some oddities, he emphasized that these definitions are meant to be fully objective so that businesses can easily comply with them. He mentioned how SST resolves the ambiguity surrounding whether a given food (such as a chocolate bar) constitutes candy based on whether the food has flour in it. He remarked that SST seeks to ensure that both states and businesses can easily administer its definitions.
• Chairman Hassan expressed appreciation for the SST’s efforts to develop standardized product definitions and commented that these standardized definitions reduce burdens for small businesses. She stated that Congress should consider ways to encourage all states to participate in these efforts.

Subcommittee Ranking Member Charles Grassley (R-IA):

• Ranking Member Grassley noted how the U.S. Supreme Court had recognized the work of SST member states in removing barriers and burdens to interstate commerce. He asked Mr. Johnson to indicate whether non-SST member states have enacted reforms to limit such barriers and burdens or taken actions to join the SST since the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision.
  • Mr. Johnson indicated that no new states have joined the SST since the U.S. Supreme Court had rendered its 2018 South Dakota v. Wayfair, Inc. decision. He stated however that non-SST member states have taken actions to gain membership into the SST and to adopt SST policies. He mentioned how several states have adopted some of the SST’s uniform definitions and uniformity provisions related to exemptions. He emphasized however that these states are not yet qualified to join the SST. He also discussed how some non-SST member states have taken unique actions to address remote sales tax collection and remittance challenges. He mentioned how Texas allows remote sellers to collect one rate for all of Texas’s local jurisdictions. He indicated that Texas will then disburse these collected sales taxes to the local jurisdictions. He commended Texas for this policy. He also noted how Pennsylvania had adopted its own CSP program that resembles the SST’s CSP program. He commented however that Pennsylvania’s CSP program is not as robust as the SST’s CSP program. He remarked that most states have not taken sufficient actions to remove undue burdens to remote sales tax collection and remittance. He noted that while most non-SST member states have complied with the U.S. Supreme Court’s calls for no retroactive remote sales tax collection and the adoption of small seller thresholds, he commented that these states have not removed undue burdens or joined the SST.
• Ranking Member Grassley noted how 30,000 sellers have registered with the SST to collect and remit sales taxes to SST member states. He mentioned how Mr. Bishop-Henchman’s testimony cites estimates that nearly 50,000 businesses are ignoring their obligations to collect and remit sales taxes and are at risk of enforcement actions. He asked Mr. Johnson to indicate whether greater adoption of simplification requirements implemented by SST member states would increase retailer compliance with their remote sales tax collection and remittance obligations.
  • Mr. Johnson recounted how SST had found in a previous survey that sellers are appreciative of SST’s measures and that these sellers want every state to adopt the SST’s simplification and uniformity provisions. He remarked that state adoption of the SST’s measures would likely improve seller compliance with remote sales tax collection and remittance obligations. He stated that SST member states have recognized that making compliance with remote sales tax collection and remittance laws simpler would lead to greater voluntary compliance, which would in turn result in higher tax revenue collections.
• Ranking Member Grassley then noted how Mr. Bishop-Henchman had discussed how multiple states are attempting to enforce pre-South Dakota v. Wayfair, Inc. decision laws. He commented that these states are effectively seeking to retroactively collect sales taxes from retailers that had not had legal obligations to collect and remit sales taxes prior to the South Dakota v. Wayfair, Inc. decision. He asked Mr. Bishop-Henchman to indicate whether individual states are generally observing the South Dakota v. Wayfair, Inc. decision’s recognition of the need for simplification to avoid imposing undue burdens on interstate commerce.
  • Mr. Bishop-Henchman remarked that individual states are not taking enough actions to pursue simplification of their remote sales tax collection and remittance policies. He remarked that while litigation should have served as a tool for preventing states from imposing undue burdens on interstate commerce, he stated that the U.S. Supreme Court’s recent National Pork Producers Council v. Ross decision limits the use of litigation to address these problems. He commented that this decision increases the need for Congress to address these undue burdens.
• Ranking Member Grassley asked Mr. Bishop-Henchman to indicate whether more states are likely to voluntarily adopt simplification measures related to remote sales tax collection and remittance or to join the SST.
  • Mr. Bishop-Henchman noted how many experts had predicted that more states would have adopted the SSUTA following the South Dakota v. Wayfair, Inc. decision. He commented however that this increased state adoption of the SSUTA has not materialized. He remarked that additional states would likely not join the SST absent incentives.
• Ranking Member Grassley indicated that he would submit additional questions for the hearing’s record.

Full Committee Chairman Ron Wyden (D-OR):

• Chairman Wyden remarked that small businesses in his state of Oregon have faced significant remote sales tax collection and remittance burdens since the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision. He discussed how state remote sales tax collection and remittance policies can be very arbitrary. He noted how Illinois imposes sales taxes on Snickers candy bars and no sales taxes on Twix candy bars. He also noted how New Jersey imposes sales taxes on yarn bought for art projects and no sales taxes on yarn bought for sweaters. He asked Mr. Bishop-Henchman to identify the top actions that could be taken to make it easier and cheaper for small remote sellers to collect and remit sales taxes.
  • Mr. Bishop-Henchman recommended the adoption of simplification measures to reduce compliance burdens for remote sellers. He noted how seller exemption certificate requirements for proof of wholesale sales can vary across states, even though these certificates tend to require similar types of information. He stated that the adoption of a single uniform exemption certificate form could reduce paperwork burdens for remote sellers. He also discussed how the actions of a small number of states can create significant remote sales tax collection and remittance challenges for sellers. He remarked that while every state should have the ability to set its own tax rates, he asserted that states should not maintain unique tax definitions or devise unique rounding methodologies.
• Chairman Wyden expressed support for simplifying the paperwork requirements related to sales tax collection and remittance for remote sellers. He mentioned how the Committee has been working to adopt uniform taxation policies for two decades and recounted the Committee’s previous efforts to ensure that digital goods and physical goods received similar tax treatment. He thanked the witnesses for working to address the paperwork burdens associated with this taxation.

Subcommittee Chairman Maggie Hassan (D-NH):

• Chairman Hassan discussed how SST member states offer the CSP program, which provides free compliance software to support small business sales tax collection efforts and a third-party that interfaces with auditors. She asked Mr. Johnson to further discuss the CSP program and how the CSP program reduces costs for small businesses.
  • Mr. Johnson discussed how SST’s CSP program contracts with numerous companies (known as CSPs) to provide tax engines to small businesses. He stated that these tax engines must provide tax calculations, tax collections, tax return preparation, and tax return filings on behalf of sellers. He expressed SST’s openness to contracting with as many CSPs as possible that can provide sufficient software and service levels to small businesses. He highlighted how CSPs seeking to participate in the CSP program must demonstrate that their software works in every single SST member state. He remarked that the SST’s CSP program has been “very successful” and emphasized that SST member states pay for the CSP program. He noted how CSPs are allowed to keep a percentage of the tax that they calculate, collect, and remit on behalf of the remote seller for compensation. He emphasized that neither states nor sellers send money directly to CSPs. He predicted that the SST’s CSP program would experience future growth.
• Chairman Hassan mentioned how her legislative discussion draft seeks to provide remote sales tax collection and remittance compliance relief to all small businesses, regardless of whether the small businesses are dealing with a state participating in the SSUTA. She then noted how small businesses that sell products into a non-SST member state will face an “entirely different” remote sales tax collection and remittance landscape. She asked Mr. Bishop-Henchman and Ms. Yetter to discuss the issues that small businesses encounter when they sell products into non-SST member states. She also asked Mr. Bishop-Henchman and Ms. Yetter to discuss the burdens that small businesses face in dealing with non-SST member states relative to dealing with SST member states.
  • Mr. Bishop-Henchman noted how the SST produces taxability matrices and commented that these taxability matrices make it easier for small businesses to determine whether a certain item is taxable within a given state. He emphasized however that these taxability matrices only apply to SST member states. He remarked that it can be very challenging for small businesses to determine the taxability of an item in non-SST member states. He noted how small businesses must often rely upon case law or previous administrative actions (which might not be published) to make taxability determinations for items in non-SST member states. He further discussed how retailers have no margin for error in collecting sales taxes. He elaborated that the under collection of sales taxes will cause retailers to be subject to audits and penalties and the overcollection of sales taxes will cause retailers to be subject to class action lawsuits from customers. He commented that this dynamic demonstrates the importance of providing businesses with precise sales tax collection and remittance rules and guidance.
  • Ms. Yetter remarked that product classification remains the main challenge for small businesses complying with remote sales tax collection and remittance policies. She mentioned that while the SSUTA maintains clear product definitions, she indicated that these clear product definitions often do not exist in non-SST member states. She noted that while sales tax compliance software might have subcategories that sellers can classify items under, she stated that sellers might not know how to properly classify items for sales tax compliance purposes. She highlighted how the SST focuses on product classification nuances as part of their review of potential CSPs seeking to participate in their CSP program.
• Chairman Hassan remarked that there exists a “clear difference” between the compliance costs that small businesses incur in dealing with SST member states and the compliance costs that small businesses incur in dealing with non-SST member states. She stated that federal legislation should address this issue. She then expressed interest in ensuring that small businesses do not need to collect out-of-state sales taxes. She discussed how many states have adopted thresholds that exempt small businesses from collecting sales taxes if the small businesses sell under $100,000 into the state in a given year. She commented that this $100,000 level is based on South Dakota’s threshold, which the U.S. Supreme Court had cited as a key small business protection as part of its South Dakota v. Wayfair, Inc. decision. She highlighted however that South Dakota is one of the U.S.’s least populated states. She commented that it is much easier for a small business to make $100,000 in sales into a larger state than into a smaller state (such as South Dakota). She asked Ms. Yetter to discuss how a higher threshold for exemption from sales tax collection and remittance requirements would help small businesses that are selling into larger states (particularly larger states that are non-SST member states).
  • Ms. Yetter remarked that the elimination of physical presence standards would be most effective action for reducing small business remote sales tax collection and remittance compliance burdens. She testified that she has many clients that are “well below” the sales thresholds for triggering remote sales tax collection and remittance obligations. She noted however that these clients will have inventory in a state, have a remote employee in a state, or have attended a tradeshow in a state and therefore have triggered physical presence in that state. She indicated that these clients that have triggered physical presence in another state will be required to collect and remit sales taxes to the state, even if the client has not met a state’s sales threshold for sales tax collection and remittance. She acknowledged that California, Texas, and New York maintain higher sales thresholds for triggering remote sales tax collection and remittance requirements. She commented however that having other large states (such as Illinois and Florida) adopt higher sales thresholds for triggering remote sales tax collection and remittance requirements would be helpful.
• Chairman Hassan asked Mr. Bishop-Henchman to discuss how having a stronger small business exemption from remote sales tax collection and remittance requirements would better reflect the burdens that small businesses bear in dealing with larger states that have not joined the SSUTA.
  • Mr. Bishop-Henchman expressed support for a remote sales tax and collection system that is simpler for all businesses. He acknowledged however that small businesses face greater compliance burdens when seeking to sell their products nationally. He commented that while these current compliance burdens may be manageable for a small business only selling into one state or for large businesses with economies of scale to deal with compliance costs, he reiterated that small businesses seeking to sell their products nationally face significant compliance burdens. He remarked that these small businesses seeking to sell their products nationally face various unappealing options. He indicated that these options include making significant monetary and time investments in becoming tax experts (which diverts resources away from business activities), selling their businesses to larger competitors, using marketplaces that charge for compliance efforts, and avoiding compliance with remote sales tax collection and remittance requirements (and thus risking enforcement actions). He raised concerns that many small businesses are currently avoiding compliance with remote sales tax collection and remittance requirements.
• Chairman Hassan highlighted how her discussion draft bill would strengthen small business exemptions from remote sales tax collection and remittance requirements. She elaborated that her discussion draft bill would set a larger sales threshold for trigging such requirements for small businesses that sell their products into larger states that have not joined the SSUTA.