Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales (U.S. Senate Committee on Finance)

Hearing	Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales
Committee	U.S. Senate Committee on Finance
Date	June 14, 2022

 

Hearing Takeaways:

• The U.S. Supreme Court’s South Dakota v. Wayfair, Inc. Decision and the Subsequent Adoption of Remote Sales Tax Collection and Remittance Policies: The hearing focused on the U.S. Supreme Court’s 2018 Court’s 2018 South Dakota v. Wayfair, Inc. decision and its impact on remote sellers. The South Dakota v. Wayfair, Inc. decision held that sates could require out-of-state small businesses to collect and remit sales taxes for transactions involving the state’s residents, even if the out-of-state small businesses lacked a physical presence within the state. 
  • State Adoption of Remote Sales Tax and Remittance Policies: Following the South Dakota v. Wayfair, Inc. decision, most states and localities adopted remote sales tax collection and remittance policies for out-of-state sellers. All 45 states with sales taxes (and the District of Columbia) had adopted requirements governing sales tax collection by remote sellers based on economic nexus (such as the amount of sales into a state). These state legal requirements for remote sales tax collection vary in numerous aspects, including effective dates, exemptions for small businesses, determinations regarding whether certain classes of products were taxable, and the applicability of local taxes. Mr. McTigue testified that the U.S. Government Accountability Office (GAO) had found that 30 of these states had reported remote sales tax collections totaling about $23 billion for 2021. He indicated that 20 of these states had reported collections from marketplace facilitators totaling about $9.5 billion.
  • Growth of E-Commerce as a Percentage of Retail Sales: Committee Members and the hearing’s witnesses highlighted how the share of commerce conducted online had grown significantly in recent decades due to technological innovation and that the COVID-19 pandemic had only accelerated this trend. They stated that the South Dakota v. Wayfair, Inc. decision therefore impacted an increasing number of small businesses as more small businesses were engaging in e-commerce.
• Remote Seller Burdens Associated with Remote Sales Tax Collection and Remittance Policies: The hearing’s witnesses discussed how the remote sales tax collection and remittance requirements from the South Dakota v. Wayfair, Inc. decision were imposing compliance and operational burdens on remote sellers. They emphasized that these burdens were particularly pronounced amongst smaller businesses that had less resources to make sense of these requirements.
  • Varying State and Local Remote Sales Tax Policies: Mr. McTigue, Mr. Hennessey, and Ms. Huie contended that variations in remote sales tax collection and remittance policies across states and localities created confusion and compliance challenges for remote sellers. They noted how states and localities had remote sales tax collection and remittance policies with varying dollar and transaction thresholds, different filing schedules, and different definitions and classifications of products and services for taxation purposes.
  • Back Tax Liabilities: Mr. Hennessey and Ms. Huie discussed how many remote sellers faced liabilities for back sales taxes dating back to the South Dakota v. Wayfair, Inc. decision. They remarked that these tax liabilities were often large and imposed significant costs on sellers. They also commented that this liability put remote sellers in a constant state of uncertainty as the sellers could be unexpectedly subject to nexus claims from other states and localities. Mr. Hennessey noted that many remote sellers were poorly equipped to dispute these claims from other states and localities due to their limited resources. He commented that it was often cheaper for these sellers to settle the claims rather than to dispute the claims, even if the seller’s claims were correct.
  • Warehouse Liabilities: Ms. Yetter mentioned how inventory held in a third-party warehouse on a seller’s behalf could sometimes create a physical nexus in certain states (which would subject the sellers to remote sales tax collection and remittance requirements).
  • Tax Collection Software Challenges: Mr. McTigue, Mr.  Hennessey, and Ms. Huie discussed how remote sellers often needed to purchase expensive tax collection software packages in order to meet their remote sales tax collection and remittance obligations. They further noted how remote sellers often needed to spend large amounts of money and time integrating this software into their existing technology systems.
  • Catalog Customer Challenges: Mr. Hennessey mentioned how that many of his company’s customers often used catalogs to purchase items and commented that these customers faced unique challenges in terms of calculating and paying their owed sales taxes. He commented that it was virtually impossible for his company to collect on remote sales tax underpayments from these customers (which was common given the higher propensity of these customers to pay by check). He asserted that this situation resulted in his company having to cover these tax obligations.
• Potential Solutions to Reduce the Burdens Associated with Remote Sales Tax Collection and Remittance: Committee Members and the hearing’s witnesses expressed interest in policy proposals to reduce the aforementioned burdens associated with remote sales tax collection and remittance.
  • Use of Multi-State Organizations: Several of the Committee Members and the hearing’s witnesses suggested that multi-state organizations could play a key role in reducing the burdens associated with remote sales tax collection and remittance for remote sellers. Mr. Johnson discussed how his organization, the Streamlined Sales Tax Governing Board (SST), was composed of 24 member states working together to simplify tax systems across the U.S. He noted that the SST provided a voluntary streamlined sales and use tax agreement and asserted that this agreement “substantially” reduced the burdens associated with tax compliance. He testified that over 18,000 active sellers were currently registered through the SST and indicated that this number continued to grow every month. Ms. Yetter suggested that Congress could provide incentives for non-SST member states to join the SST. Ms. Huie remarked however that the SST’s system still involved numerous different tax rates and imposed significant technology costs on many small businesses.
  • Uniform Definitions for Economic Nexus, Products, and Services: Committee Members and the hearing’s witnesses expressed interest in developing uniform definitions for economic nexus products, and services to make it easier for remote sellers to collect and remit sales taxes. Full Committee Chairman Ron Wyden (D-OR) mentioned how he had introduced the Online Sales Simplicity and Small Business Relief Act to provide clear, standardized rules that would govern what states could demand of small businesses with no physical presence within their states. Mr. Johnson and Ms. Yetter highlighted how the SST agreement provided sales tax collection and remittance process simplifications and uniform definitions. Ms. Yetter noted how the SST agreement provided member states with discretion on whether and how much to tax these commonly defined products.
  • Establishment of a Single Remote Sales Tax Rate for States and Limits on Audits: Mr. Hennessey and Ms. Huie recommended that Congress simplify sales tax rates to be no more than one rate per state. Ms. Huie stated that this approach would make calculating sales tax amounts much easier and would help to reduce reliance on expensive technologies. Mr. Hennessey also predicted that audits would become a “severe” burden for his business and proposed that companies be subject to one audit on an annual basis that would encompass all states. 
  • Establishment of a Centralized Clearinghouse for Registering and Paying Sales Tax: Ms. Huie stated that there should exist a more centralized clearinghouse for companies to register with. She indicated that this clearinghouse would facilitate the remittance of sales taxes. Mr. Johnson mentioned how the SST maintained a central registration system for remote sellers and commented that this system made it very easy for these sellers to collect and remit sales taxes to SST member states. He testified that SST had just started to develop a centralized filing portal. Ms. Yetter stated that centralized administration of remote sales taxes ought to be required before any sales tax collection responsibility would be permitted on out-of-state sellers. She also contended that localities should be required to maintain central registration and administration as a prerequisite for the enforcement of their remote sales tax requirements.
  • Establishment of Sales Tax Liability Protections for Remote Sellers: Mr. Hennessey expressed support for providing remote sellers with protections from sales tax liability so long as the sellers put forward a good faith effort to comply with remote sales tax collection and remittance laws.
  • Provision of Phase-In Periods for New Remote Sales Taxes: Mr. Hennessey further remarked that a phase-in period for any new taxes (including sales taxes) would be “extremely helpful” for remote sellers. He suggested that states provide remote sellers with at least a one-year phase-in period for new taxes and fees on remote sellers so that the sellers could have time to learn about the taxes and prepare for their new obligations. Sen. Ben Cardin (D-MD) expressed receptiveness towards this proposal.
• Other Policy Implications of the South Dakota v. Wayfair, Inc. Decision: In addition to the direct impacts of the South Dakota v. Wayfair, Inc. decision on remote sellers, Committee Members and the hearing’s witnesses expressed interest in how the decision would have implications beyond sales taxes and the federal treatment of state tax policies.
  • Remote Seller Liability for Taxes Beyond Sales Tax: Mr. Hennessey discussed how states were beginning to impose new taxes and fees on out-of-state businesses that extended beyond sales taxes. He mentioned how California had recently sent his company a notice demanding that the company pay income tax on the basis that the company conducted business in California. He highlighted how his company had no physical presence in California and added that federal law protected the company from such tax liability. He noted how his company must now incur time and legal fees to defend itself from California’s assertion against the company. He also mentioned how another state had announced a new 27-cent retail delivery fee on any remote retail sale delivered to a customer in its state and remarked that his company must now rewrite its computer system in order to comply with this new fee. He expressed concerns that the aforementioned new fee could lead states to impose more novel taxes and fees on out-of-state sellers in the coming years.
  • Reconsideration of the Tax Injunction Act (TIA): Sen. Steve Daines (R-MT) noted how the South Dakota v. Wayfair, Inc. decision posed implications for the TIA, which generally prevents access to federal courts to resolve state tax disputes. He commented that the TIA functioned well in an economic environment where small businesses were only subject to taxes in one state. He stated however that the TIA ought to be reconsidered in an economic environment in which small businesses were subject to taxes in multiple states.
  • Taxation of Digital Goods and Services: Sen. John Thune (R-SD) expressed interest in how many states were seeking to modernize their tax bases to include digital goods and services. Mr. Johnson testified that the SST agreement maintained uniform sourcing rules that applied to all products (including both tangible and digital goods and services). He also noted how the SST agreement maintained uniform definitions for certain digital products and highlighted how some non-SST member states had adopted these definitions. Ms. Yetter remarked that there remained challenges related to how certain digital goods were defined and highlighted the uncertainty surrounding the classification of non-fungible tokens (NFTs). She expressed support for efforts to further clarify the definitions for digital goods. 

Hearing Witnesses:

1. Mr. James R. McTigue Jr., Director, Tax Policy and Administration, U.S. Government Accountability Office
2. Mr. John Hennessey, President and CEO, Littleton Coin Company, Inc.
3. Ms. Michelle Huie, Founder and CEO, VIM & VIGR Compression Legwear
4. Mr. Craig Johnson, Executive Director, Streamlined Sales Tax Governing Board
5. Ms. Diane L. Yetter, President and Founder, Sales Tax Institute

Member Opening Statements:

Full Committee Chairman Ron Wyden (D-OR):

• He discussed how small businesses were currently dealing with the impact of the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision and noted that the decision permitted states to require small businesses to collect and remit sales taxes when they sold goods and services online.
  • He elaborated that these small businesses could be required to collect and remit taxes for states in which they lacked a physical presence.
• He noted how states had begun to pass online sales tax collection laws following the South Dakota v. Wayfair, Inc. decision.
• He highlighted how his state of Oregon did not have a sales tax and remarked that online sales tax collection and remittance laws from other states imposed new costs and complexities on his state’s small businesses.
  • He added that other states without sales taxes (including Montana and New Hampshire) had been adversely impacted by the South Dakota v. Wayfair, Inc. decision.
• He asserted that the South Dakota v. Wayfair, Inc. decision’s burdens were not limited to small businesses located in states without sales taxes.
• He discussed the complexity of the U.S.’s sales tax system and noted how 45 states and hundreds of localities maintained different sales tax laws, rates, rules governing collection, and definitions for taxable products.
• He stated that the South Dakota v. Wayfair, Inc. decision forced small businesses to navigate this myriad of different laws.
  • He asserted that this situation effectively forced small businesses to purchase expensive software and retain consultants in order to comply with these various laws.
• He remarked that Congress ought to provide relief to small businesses from the South Dakota v. Wayfair, Inc. decision and suggested that Congress exempt small businesses with revenue under a certain threshold from sales tax collection and remittance requirements.
• He stated that Congress ought to establish clear, standardized rules that would govern what states could demand of small businesses with no physical presence within their states.
  • He mentioned how he had introduced the Online Sales Simplicity and Small Business Relief Act to establish such standards.
• He contended that Congress’s failure to respond to the South Dakota v. Wayfair, Inc. decision would lead an increasing number of Oregon small businesses to experience demands from other state governments over tax liabilities that these businesses could not effectively dispute.

Full Committee Ranking Member Mike Crapo (R-ID):

• He discussed how states can now require online sellers to collect and remit sales taxes from residents of states with sales taxes following the U.S Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc.
• He stated that this decision highlighted the challenges faced by both the public and private sectors to respond and evolve to the “rapid” growth of e-commerce.
  • He noted how the share of commerce conducted online had grown “dramatically” in recent decades due to technological innovation and added that the COVID-19 pandemic had only accelerated this trend.
• He discussed how the internet had benefited both buyers and sellers through providing sellers with access to markets and through providing buyers with access to new retailers beyond their physical locations.
• He stated however that the growth of e-commerce put traditional methods for collecting sales tax at risk.
  • He mentioned how the GAO had reported in 2017 that state governments were losing out on billions of dollars in sales tax revenue as a result of online sales in the pre-South Dakota v. Wayfair, Inc. decision environment.
• He noted how 45 states and the District of Columbia impose taxes on remote sales that exceed economic nexus thresholds.
  • He highlighted how the Tax Foundation had found that these sales taxes accounted for more than one-fifth of state and local tax collections in 32 states and that these taxes accounted for more than one-third of state and local tax collections in 11 states.
• He stated that the South Dakota v. Wayfair, Inc. decision attempted to address the disparate treatment of brick-and-mortar stores and online sellers.
  • He emphasized that the decision did not result in the imposition of sales taxes on residents of non-sales tax states.
• He then remarked that the different sales tax standards and thresholds between states and localities could create a burdensome and complex system that makes compliance difficult for small businesses.
  • He commented that sellers must now either learn to comply with the myriad of tax jurisdictions where their customers reside or hire specialized advisors.
• He stated that while states and multi-state organizations had taken “important steps” to ease the burdens associated with remote sales tax collections and remittances, he asserted that a comprehensive solution to this problem remained “evasive.”
• He remarked that the U.S. must balance the ability of states to collect sales taxes due to them and the ability of businesses to not face unreasonable burdens.
  • He contended that a sales tax system with more consistent thresholds and standards would allow for businesses to more efficiently comply with tax laws and regulations and provide tax certainty (which would reduce the risk of audits and penalties).

Witness Opening Statements:

Mr. James R. McTigue Jr. (U.S. Government Accountability Office):

• He remarked that sales taxes served as important revenue sources for states and noted how sales taxes accounted for about one-third of all state tax revenues.
  • He indicated that 45 states and the District of Columbia had statewide sales taxes.
• He discussed how states had quickly moved to implement legal requirements for remote sellers following the U.S. Supreme Court’s 2018 South Dakota v. Wayfair, Inc. decision.
  • He noted that all 45 states with sales taxes (and the District of Columbia) had adopted requirements governing sales tax collection and remittance by remote sellers based on economic nexus criteria (such as the amount of sales into a state).
• He stated that these state legal requirements for remote sales tax collection and remittance varied in numerous aspects, including effective dates, exemptions for small businesses, determinations regarding whether certain classes of products were taxable, and the applicability of local taxes.
  • He commented that these variations added to compliance burdens for businesses.
• He highlighted how states had established different dollar and transaction thresholds that exempt many small businesses from remote sales tax collection and remittance requirements.
  • He further stated that there existed “significant differences” in the type of sales that were included in threshold calculations, as well as reporting frequencies and periods.
• He remarked that local sales taxes added an additional layer of complexity for remote sales tax collection and remittance requirements and noted how 37 states had local sales taxes in addition to state sales taxes.
  • He added that Alaska had local sales taxes (but no statewide sales tax).
• He noted how an estimated 30,000 jurisdictions possessed the authority to impose sales taxes and indicated that between 10,000 and 12,000 of these jurisdictions actually imposed these taxes.
• He then mentioned how the GAO had estimated in 2017 that states could gain an average of about $200 million in tax revenue annually if states were provided expanded authority to collect sales taxes on remote sales.
  • He added that the GAO had estimated that this figure could reach $1 billion for larger states.
• He discussed how the GAO had recently surveyed the revenue departments of all 45 states that maintained sales taxes (and the District of Columbia) and testified that 30 of these states had reported remote sales tax collections totaling about $23 billion for 2021.
  • He indicated that 20 of these states had reported collections from marketplace facilitators of about $9.5 billion.
• He then noted how the GAO had identified three categories of costs that businesses encounter with remote sales tax collection and remittance: software-related costs, audit and assessment costs, and costs associated with research and liability.
• He indicated that businesses had told the GAO that available remote sales tax collection and remittance software was not perfect and that sellers faced general liability for any errors.
• He also highlighted how businesses had told the GAO that state-level sales tax audits were occurring and that these businesses had spent “substantial” resources responding to these audits.
  • He remarked that state revenue departments had many low-cost enforcement tools, including compliance letters and informational questionnaires, and commented that these tools created burdens for businesses (especially those selling into multiple states).

Mr. John Hennessey (Littleton Coin Company, Inc.):

• He noted how his company, Littleton Coin Company, had never been required to collect and remit state and local sales taxes prior to the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision.
• He remarked that the South Dakota v. Wayfair, Inc. decision had immediately required his company to become a tax collector for up to 12,000 state and local jurisdictions.
  • He commented that his company lacked the ability to calculate and collect sales taxes from its customers, which made the company liable for covering these taxes.
• He stated that his company had rushed to become compliant with the South Dakota v. Wayfair, Inc. decision and testified that his company had incurred $225,000 in costs to purchase software, hire outside tax and legal experts, pay third party software developers, and devote its internal information technology (IT) team to rewriting the company’s computer systems.
  • He attested that the company had become compliant to the best of its interpretation of the laws of each state by January 1, 2019.
• He testified that his company continued to spend $50,000 annually in third party costs for software licensing, registration fees, tax filing accounting services, and legal advice.
  • He further noted how his company spent hundreds of hours annually of its own finance, IT, customer service time to remain in compliance with state remote sales tax collection and remittance laws.
• He discussed how his company was now subject to numerous non-sales taxes in many states, including franchise, business, commercial activity, and business and occupation taxes.
  • He indicated that these taxes totaled $40,000 annually for the company.
• He testified that his company had paid over $500,000 since 2018 to comply with state-imposed taxation requirements resulting from the South Dakota v. Wayfair, Inc. decision.
• He mentioned how his company registered with and regularly filed and paid taxes to 45 states and owed taxes to over 1,500 individual jurisdictions with individual tax rates.
  • He noted how his company sold over 10,000 different products and indicated that each state had its own laws for product classifications and exemptions.
• He remarked that the sheer complexity of commercial tax software constituted a risk to his business and highlighted how a recent software update had resulted in an error that took 100 hours to resolve and that had imposed $5,000 in expenses.
  • He stated that the volume of changing requirements and legal updates were overwhelming to businesses and commented that software alone could not address these challenges.
• He then discussed how states were beginning to impose new taxes and fees on out-of-state businesses that extended beyond sales taxes.
• He mentioned how California had recently sent his company a notice demanding that it pay income tax on the basis that the company conducted business in California.
  • He highlighted how his company had no physical presence in California and added that federal law protected the company from such tax liability.
• He noted how his company must now incur time and legal fees to defend itself from California’s assertion against the company.
  • He estimated that legal fees would exceed $100,000 if his company were forced to engage in litigation in order to resolve this dispute.
• He also mentioned how another state had announced a new 27-cent retail delivery fee on any remote retail sale delivered to a customer in its state and remarked that his company must now rewrite its computer system in order to comply with this new fee.
  • He expressed concerns that this new fee could lead more states to impose more novel taxes and fees on out-of-state sellers in the coming years.
• He then discussed how his company had received notices demanding retroactive tax payments for periods as far back as 2018.
  • He noted that his company had been unable to collect sales taxes for these historical tax periods, which forced the company to cover these tax bills themselves.
• He stated that the legal cost associated with challenging these demands exceeded the tax liability, which had forced his company to settle these tax disputes with three states for about $140,000.
• He also discussed how his company was subject to 45 separate annual state audits and “countless” county and local audits and highlighted how each of these audits imposed administrative burdens and costs on the company.
• He called on Congress to take bipartisan action to respond to the South Dakota v. Wayfair, Inc. decision and help small businesses to collect remote sales taxes.

Ms. Michelle Huie (VIM & VIGR Compression Legwear):

• She noted that while her home state of Montana did not have a sales tax, she indicated that most of the revenue for her company, VIM & VIGR Compression Legwear, came from outside of Montana.
• She remarked that there were several challenges associated with the determination, collection, and remittance of sales taxes and noted how there existed varying threshold criteria across states.
  • She elaborated that these criteria included revenue, transaction volume, storage of physical products (including Amazon warehouses), and the usage of products.
• She further noted how states had varying sales tax rates and how most states maintained numerous tax rates.
  • She commented that this dynamic had been overwhelming for her company.
• She mentioned how her company’s sales tax consultant had determined that the company had economic nexus in 22 states and called this determination surprising given how her company had derived most of its revenue from wholesalers and resellers.
  • She indicated that e-commerce had only accounted for 30 percent of her business at the time of this determination.
• She also noted how her company had then needed to register with departments of revenue for each of the 22 states, which she called “no small feat.”
• She testified that her company had spent close to $50,000 on out-of-pocket technology costs and labor to comply with sales tax collection and remittance laws.
• She remarked that online retailers wanted to comply with existing tax laws and asserted that the current tax landscape was “excessively” complicated and imposed major costs and administrative burdens.
  • She stated that there had been businesses forced to close due to the administrative complexity and costs associated with the collection and remittance of remote sales taxes.
• She called on Congress to simplify the process for online retailers to collect and remit sales taxes.
• She specifically recommended that Congress create some uniformity surrounding the criteria for calculating sales tax nexus and commented that this uniformity would make the sales tax collection and remittance process more transparent for businesses.
• She also remarked that states should provide one tax rate for online transactions, which she asserted would make calculating sales tax amounts much easier and would help to reduce reliance on expensive technologies.
• She further recommended the establishment of a centralized clearinghouse to facilitate sales tax registration and payment.
  • She commented that this would save businesses and states significant time.
• She also remarked that existing technology platforms meant to address the collection and remittance of remote sales taxes were very expensive and did not address all of the administrative costs associated with the sales tax collection and remittance process.

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

• He discussed how his organization, the SST, was composed of 24 member states that worked together to simplify their tax systems.
• He noted that the SST provided a voluntary streamlined sales and use tax agreement and asserted that this agreement “substantially” reduced the burdens associated with tax compliance.
• He recounted how South Dakota had enacted legislation in 2016 to require remote sellers to collect and remit sales taxes if they met certain thresholds.
  • He indicated that these thresholds involved either engaging in 200 or more transactions within the state or having $100,000 or more in gross revenue in a calendar year.
• He mentioned how the U.S. Supreme Court had ruled in its 2018 South Dakota v. Wayfair, Inc. decision that remote sellers that exceeded South Dakota’s thresholds had substantial nexus within the state (which required these sellers to collect and remit sales taxes to South Dakota).
• He indicated that all SST member states have subsequently adopted similar economic nexus thresholds.
  • He stated that the SST had worked to assist remote sellers in complying with their sales tax collection and remittance obligations.
• He noted how the U.S. Supreme Court had determined that South Dakota’s remote sales tax law contained three features that were designed to prevent discrimination against or undue burdens upon interstate commerce.
  • He indicated that these features were the law’s safe harbor to protect companies with limited activity within South Dakota, the fact that the law could not be applied retroactively, and South Dakota’s adoption of the SST’s streamlined sales and use tax agreement.
• He highlighted how all SST member states had voluntarily enacted the simplification and uniformity provisions contained in the SST’s streamlined sales and use tax agreement.
• He then discussed how the South Dakota v. Wayfair, Inc. decision had recognized some of the SST’s streamlined sales and use tax agreement’s key provisions, including the imposition of a single state-level administration of a state and local tax, uniform definitions of products and services, and simplified state and local tax rate structures.
  • He also mentioned how SST states offered a “free and simple” online registration system for sellers, taxability matrices that indicate what is taxable or exempt in each state, and uniform exemption rules.
• He further noted how the South Dakota v. Wayfair, Inc. decision had formally recognized the SST Certified Service Provider (CSP) program, which allows for remote sellers to “substantially” reduce their compliance burdens through outsourcing their sales and use tax collection and remittance obligations.
  • He explained that the CSP program covered the software and services necessary to integrate the CSP’s tax engine with the seller’s system, calculate the tax due on transactions at the time of sale, prepare and file the tax returns for each state, make the necessary remittances, and handle any notices from or audits conducted by SST member states.
• He indicated that CSPs were compensated by SST states (rather than by remote sellers) for the provision of their services to remote sellers making sales sourced to their respective states.
• He testified that over 18,000 active sellers were currently registered through the SST and indicated that this number continued to grow by between 150 sellers and 300 sellers every month.
• He concluded that the simplification and uniformity provisions enacted by SST member states made the remote sales tax collection and remittance process easier for sellers.
  • He stated that SST member states would continue to implement the remote seller collection authority granted under the South Dakota v. Wayfair, Inc. decision in a “fair and reasonable” manner.

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

• She expressed support for rules that resulted in the equitable collection and remittance responsibilities of sales tax by sellers and asserted that true equity would require greater uniformity with clear requirements and guidance from states.
  • She commented that this uniformity and clarity would foster compliance, reduce burdens on all sellers (both local and remote), and promote reasonable enforcement.
• She acknowledged that while the U.S.’s subnational sales tax structure would inherently lead to varying rules across states, she remarked that states should work to reduce the complexity and variations of the laws that can create avoidable burdens for sellers.
• She stated that the costs related to the collection and remittance of sales taxes was not dissimilar to other business costs.
  • She acknowledged however that these costs in totality could impact a company’s ability to remain in business.
• She remarked that the economic nexus rules enacted as a result of the South Dakota v. Wayfair, Inc. decision have made it more difficult for some businesses to comply with sales tax laws and rules and commented that compliance burdens still existed for all businesses.
  • She stated that Congress and states could take actions to further reduce the burdens on business.
• She highlighted how states had engaged in sales tax simplification efforts to support the significant increase in registrations following the South Dakota v. Wayfair, Inc. decision.
  • She commented that the South Dakota v. Wayfair, Inc. decision and state law changes had helped to clarify when sales tax collection was required.
• She also stated that the adoption by all states of the Marketplace Facilitator Collection provisions had reduced the burden on the smallest online sellers that utilize online platforms through shifting the burdens of tax collection to larger marketplace businesses.
  • She further mentioned how some states had adopted beneficial tax rate structures that minimize local tax jurisdiction compliance challenges.
• She discussed how pre-South Dakota v. Wayfair, Inc. decision physical nexus standards still existed and highlighted how states were continuing to enforce these standards against taxpayers that fell below sales thresholds.
  • She noted how inventory held in a third-party warehouse on a seller’s behalf to facilitate faster delivery could create a physical nexus, even if the seller was below sales thresholds.
• She stated that this dynamic could result in “significant” retroactive tax assessments against sellers.
• She remarked that the lack of uniformity across states on economic nexus thresholds, registration requirements, legal definitions, and compliance requirements imposed significant burdens on businesses of all sizes.
  • She further commented that local taxes (particularly in the states with local home rule authority) created confusion and chaos for businesses.
• She stated that focusing on uniformity across states and promoting widespread membership in the SST’s streamlined sales and use tax agreement would have the greatest impact on minimizing burdens for sellers.
  • She noted that while 24 states currently participated in the SST’s streamlined sales and use tax agreement, she indicated that none of the largest states participated in this agreement.
• She also called for increased uniformity on economic nexus thresholds and for SST member states.
  • She further called for the creation of a centralized administrative function for these states.
• She lastly remarked that the elimination of “archaic” physical presence nexus standards in conjunction with more uniform economic nexus standards would eliminate barriers to business growth through eliminating registration requirements for the smallest businesses. 

Congressional Question Period:

Full Committee Chairman Ron Wyden (D-OR):

• Chairman Wyden noted how small businesses were currently dealing with inflation and supply chain challenges. He remarked that the issue of remote sales tax collection and remittance further compounded the challenges facing small businesses. He noted how Mr. Hennessey had told the Committee that his company had spent over $500,000 on sales tax collection and remittance since the South Dakota v. Wayfair, Inc. decision. He asked Mr. Hennessey to discuss how his company was dealing with these new costs (especially in light of the current inflationary environment).
  • Mr. Hennessey noted that his company had spent about $250,000 to become compliant with state sales tax and remittance laws and had spent another $250,000 in ongoing compliance costs. He called this spending a “significant burden” for his company and stated that his company would otherwise reinvest this money into the business absent these sales tax collection and remittance obligations. He highlighted how his company was employee-owned, which meant that this spending on remote sales tax collections and remittances was being diverted away from the company’s employee-owners.
• Chairman Wyden asked Mr. Hennessey to identify actions that he would like the Committee to take to ease burdens and reduce costs for remote sellers.
  • Mr. Hennessey first recommended that Congress simplify sales tax rates to be no more than one rate per state. He also called for uniform product classifications and definitions across states. He further stated that Congress should protect businesses from retroactive tax liability. He mentioned how his company had already paid $140,000 in retroactive demands from states. He then predicted that audits would become a “severe” burden for his business and proposed that companies be subject to one audit on an annual basis that encompasses all states. He lastly recommended that Congress protect companies from areas beyond sales taxes.
• Chairman Wyden expressed interest in working with the witnesses and the Committee to simplify the sales tax collection and remittance process.

Full Committee Ranking Member Mike Crapo (R-ID):

• Ranking Member Crapo asked Ms. Huie to provide any additional recommendations for the Committee for easing the burdens and reducing the costs for remote sellers.
  • Ms. Huie first expressed agreement with Mr. Hennessey’s previous recommendations on the topic. She then recommended the establishment of a single remote sales tax rate per state. She commented that a single rate would reduce the dependence of small businesses on expensive technology to collect and remit sales taxes. She also stated that there should exist a more centralized clearinghouse for companies to register with. She indicated that this clearinghouse would facilitate the remittance of sales taxes. She mentioned how her company currently had to register with the departments of revenue for each state that it met nexus thresholds for.
• Ranking Member Crapo asked Mr. Hennessey and Ms. Huie to indicate whether the issues that they had previously raised would be resolved if all 50 states were members of the SST.
  • Ms. Huie noted how states could maintain numerous different tax rates and commended the SST for making these tax rates transparent and creating “boundaries” for these rates. She remarked however that the SST’s system still involved numerous different tax rates and imposed significant technology costs on many small businesses.
  • Mr. Hennessey commented that many of the SST’s provisions were “sound.” He further called for uniform classifications and definitions of products across states for sales tax purposes.
• Ranking Member Crapo then asked Mr. Johnson to explain why certain states had resisted joining the SST.
  • Mr. Johnson remarked that he could not speak on behalf of the states that were not members of the SST. He testified that the SST had reached out to all states to join the organization and commented that there would be “great benefits” associated with all states joining the SST agreement. He highlighted how the SST agreement provided sales tax collection and remittance process simplifications and uniform definitions. He stated that the SST was continuing to work to develop uniform definitions in response to business community feedback. He also mentioned how the SST maintained a central registration system for remote sellers and commented that this system made it very easy for these sellers to collect and remit sales taxes to SST member states. He testified that SST had just started to develop a centralized filing portal.
• Ranking Member Crapo then remarked that the issue of sales tax collection and remittance was one of many complex policy issues that stemmed from policy variations across states. He emphasized that states all possessed a degree of sovereignty. He asked Ms. Yetter to discuss how Congress should account for the issue of state sovereignty when addressing the issue of sales tax collection and remittance.
  • Ms. Yetter remarked that one of the benefits of the SST agreement was that it enabled states to maintain their sovereignty. She noted how the SST agreement provided common definitions for certain items across SST member states and provided these states with discretion on whether and how much to tax these commonly defined products.

Sen. Tom Carper (D-DE):

• Sen. Carper highlighted how his state of Delaware did not have a sales tax and stated that this lack of a sales tax had helped to foster a vibrant retail industry for the state. He expressed interest in working to support small businesses in complying with the “patchwork” of different state sales tax regimes. He asked Ms. Huie and Mr. Hennessey to discuss the challenges that their companies faced with regard to state sales tax remittance.
  • Ms. Huie remarked that it was difficult for her company to research and determine whether it met nexus thresholds in each of the states that it did business in, register with all of the relevant state departments of revenue, and comprehend the varying requirements across states for sales tax collection and remittance. She also noted how sales tax remittance schedules across states varied, which created additional challenges for her company. She further mentioned how her company needed to consider the extent to which it performed sales tax collections and remittances in-house and how it would integrate its sales tax collection and remittance systems with its current technology systems.
  • Mr. Hennessey stated that his company faced similar challenges to Ms. Huie’s company with regard to the collection and remittance of sales taxes. He also highlighted how product exemptions varied across states and he called this landscape “overwhelming” for his company given the number of products that it sold. He remarked that uniformity of definitions across states would be “very helpful” in enabling companies to comply with sales tax collection and remittance laws.
• Sen. Carper asked Ms. Huie and Mr. Hennessey to provide recommendations for policymakers for alleviating the challenges associated with remote sales tax collection and remittance for small businesses.
  • Ms. Huie suggested that policymakers could establish a simplified tax rate for each state. She also called for the establishment of a centralized clearinghouse that would facilitate company registrations with departments of revenue and sales tax remittances.
  • Mr. Hennessey remarked that a phase-in period for any new taxes (including sales taxes) would be “extremely helpful” for remote sellers. He suggested that states provide remote sellers with at least a one-year phase-in period for new taxes and fees on remote sellers so that the remote sellers could have time to learn about the taxes and prepare for their new obligations.
• Sen. Carper then asked Mr. Johnson and Ms. Yetter to identify barriers for states to become full members of the SST and to identify actions that could be taken to encourage more states to join the SST agreement. He requested that Mr. Johnson and Ms. Yetter respond to the question in writing for the hearing’s record.

Sen. Charles Grassley (R-IA):

• Sen. Grassley asked Mr. McTigue to indicate whether the additional revenues from state sales taxes on remote sellers had matched the GAO’s expectations.
  • Mr. McTigue answered affirmatively. He testified that the GAO had reported that states had collected about $23 billion in taxes from remote sellers with economic nexus in 2021, which was a greater figure than the GAO had estimated in 2017. He stated however that the COVID-19 pandemic, inflation, and the general growth of e-commerce all likely contributed to this $23 billion figure.
• Sen. Grassley asked Ms. Yetter to discuss how states were auditing remote sellers. He also asked Ms. Yetter to address whether state audits for remote sellers were as onerous as state audits for in-state sellers.
  • Ms. Yetter mentioned how states were beginning to conduct audits of remote sellers. She noted that most of these audits of remote sellers were occurring remotely, which she suggested could be due to the pandemic. She noted how states were requesting information from remote sellers and then using this information to assess a remote seller’s tax liability. She indicated that her tax consulting firm worked with remote sellers to share information with states and reduce the potential for misunderstandings with states.
• Sen. Grassley then noted how every state with a sales tax and the District of Columbia had adopted laws for governing the collections and remittances of remote sales taxes since the South Dakota v. Wayfair, Inc. decision. He asked Mr. Hennessey, Ms. Huie, and Ms. Yetter to indicate whether states had provided sufficient outreach and education to remote sellers to help them understand their legal obligations.
  • Ms. Huie recounted how she had experienced challenges in terms of finding information from states about thresholds for economic nexus in the immediate aftermath of the South Dakota v. Wayfair, Inc. decision.
  • Mr. Hennessey testified that he could not recount any instances in which states had reached out to his company regarding their remote sales tax collection and remittance obligations. He remarked that his company had proactively researched the issue in order to ensure their compliance with these obligations. He mentioned that this research involved the hiring of consultants. He also indicated that states did provide notices to his company regarding owed taxes that the company might not be aware of.
  • Ms. Yetter remarked that state outreach and education efforts related to remote sales tax collection and remittance obligations varied heavily. She stated that the SST member states had likely done the best job in terms of engaging in outreach and education efforts on the issue. She commented that certain states had been unclear regarding their remote sales tax collection and remittance requirements. She mentioned how her organization had provided resources to remote sellers to help them to understand their remote sales tax collection and remittance obligations.
• Sen. Grassley asked Ms. Yetter and Mr. McTigue to indicate whether states had generally enforced their sales tax rules for remote sellers in a neutral and non-discriminatory manner.
  • Ms. Yetter remarked that states had enforced economic nexus requirements consistently across sellers in the same situation based on her experience. She stated however that states were treating sellers with physical presence differently than sellers with economic presence.
  • Mr. McTigue testified that the GAO had not seen instances of discrimination from states regarding their enforcement of sales tax rules for remote sellers. He remarked that states were grappling with how to impose remote sales taxes in light of declines in traditional sales tax receipts.

Sen. Ben Cardin (D-MD):

• Sen. Cardin mentioned how he was the Chairman of the U.S. Senate Committee on Small Business and Entrepreneurship and expressed interest in how the South Dakota v. Wayfair, Inc. decision impacted small businesses. He noted how his state of Maryland maintained a sales tax and expressed interest in ensuring a fair sales tax ecosystem for his state’s retailers. He also stated that he was sensitive to the problems faced by small businesses. He expressed interest in having the federal government develop a policy solution that would provide for a fair sales tax ecosystem and remove unnecessary compliance burdens for small businesses. He commented that the existence of collection and reporting thresholds helped to reduce sales tax collection and remittance challenges for many small businesses. He asked Ms. Yetter to provide her assessment regarding the usefulness of the SST agreement. He also asked Ms. Yetter to address whether Congress could take actions to strengthen the SST agreement or to encourage participation in the SST agreement. He suggested that Congress could make compliance with the SST’s standards a prerequisite for a certain level of compliance with remote sales tax collection and remittance requirements. He acknowledged that his state of Maryland was not an SST member state. He also expressed receptiveness to Mr. Hennessey’s suggestion that there should exist a phase-in period for new remote sales taxes.
  • Ms. Yetter remarked that one of the biggest benefits of the SST agreement was its provision of common definitions and stated that these common definitions facilitated compliance for small businesses. She highlighted how the SST provided a centralized ability to submit a request for a ruling that could further clarify areas of uncertainty for remote sellers. She also noted how the SST provided a centralized depository of information, annually updated taxability matrices, and liability protections for sellers that relied upon the organization’s published information. She further remarked that the SST provided a very simplified registration system for remote sellers. She noted that this registration system did not require remote sellers to provide lists of their officers or Social Security Numbers (SSNs). She then stated that a centralized compliance system that enabled remote sellers to file their sales tax returns in a single location would be the next step for simplifying the tax filing process and reducing burdens on small businesses.
• Sen. Cardin asked Ms. Yetter to indicate whether Congress could support the SST infrastructure in order to reduce the costs of SST compliance software. He suggested that Congress may consider providing safe harbor protections for SST member states.
  • Ms. Yetter suggested that Congress could provide incentives for non-SST member states to join the SST. She also suggested that Congress could require that states provide clear thresholds and definitions for states to enforce remote sales tax collections and remittances.

Sen. Maggie Hassan (D-NH):

• Sen. Hassan called the South Dakota v. Wayfair, Inc. decision “unfair” and asserted that the decision had imposed undue burdens on small businesses. She commented that the decision had effectively forced small businesses to become tax collectors for out-of-state governments. She remarked that Congress must reverse this decision. She stated that Congress must also work to help the businesses harmed by the decision during the interim period. She mentioned how Mr. Hennessey’s company had paid $500,000 thus far to comply with the new tax obligations under the South Dakota v. Wayfair, Inc. decision. She noted how different states maintained different filing and registration processes (including different websites and forms) and highlighted how some states required remote sellers with economic nexus to maintain a physical address within their states. She added that these rules from different states often changed with little notice. She asked Mr. Hennessey to discuss the monetary costs and compliance burdens imposed on his company as a result of this “patchwork” of filing requirements.
  • Mr. Hennessey mentioned how his company needed to file taxes in 45 states and indicated that these filings usually occurred on a monthly basis. He called these obligations “overwhelming” for his company and noted how his company usually needed to file over 500 of these tax returns per year. He testified that the total cost of these filings equated to about $20,000 annually. He expressed support for the establishment of a single registration for remote sales tax collections and remittances that would cover all states. He also stated that it would be helpful for states to collect these returns on an annual basis (rather than on a monthly basis).
• Sen. Hassan noted how Mr. Hennessey’s testimony indicated that his company needed to collect sales taxes from over 1,500 jurisdictions with varying tax rates. She asked Mr. Hennessey to discuss the difficulties that his company faced in terms of trying to collect sales taxes at varying tax rates.
  • Mr. Hennessey remarked that software helped his company to collect and remit sales taxes based on the most up-to-date tax rates to the jurisdictions where they had economic nexus. He noted however that many of his company’s customers often used catalogs to purchase items and commented that this situation presented a “unique burden” to his company. He indicated that his company would need to provide its catalog customers with 40 pages of text in order to ensure that the customers would have sales tax information readily available. He further noted how many of his company’s catalog customers tended to pay via check, which often resulted in accidental underpayments or overpayments. He commented that it was “virtually impossible” for his company to collect these underpayments, which resulted in his company having to cover these tax obligations. He lastly testified that his company’s customer service department spent about 300 hours per year answering sales tax questions from customers.
• Sen. Hassan highlighted how remote sellers would always face the prospect of receiving auditing notices from states and local governments that imposed sales taxes. She asked Mr. Hennessey to discuss the legal and other types of costs that his company was preparing for in order to respond to potential audit notices from states and local governments.
  • Mr. Hennessey remarked that his company had worked diligently to map its 10,000 unique products to the various state and local tax rules. He noted how state and local exemption rules for one of his company’s product categories were often only a couple of lines of text that his company must then interpret itself. He stated that his company was fearful that it would have to spend “months” responding to any single audit request. He noted how his company could not go back and collect taxes in the event that they make an improper classification and commented that his company would thus be financially responsible for rectifying improper tax collections. He lastly highlighted how his company would incur legal costs in responding to audit notices.
• Sen. Hassan commented that the Mr. Hennessey’s company’s experience was not unique and called on Congress to provide “immediate relief” to small businesses regarding their remote sales tax collection and remittance obligations. She then expressed concerns over how out-of-state governments were overreaching in order to obtain tax revenue from remote sellers. She mentioned how she had introduced legislation to prevent out-of-state governments from retroactively requiring small businesses to collect taxes. She noted how Mr. Hennessey had indicated that his company had been forced to pay retroactive taxes using their own funds and how his company could not dispute these tax collections without incurring high legal costs. She asked Mr. Hennessey to elaborate on these instances.
  • Mr. Hennessey noted how the South Dakota v. Wayfair, Inc. decision did not provide an implementation period. He testified that it took his company seven months to acquire and customize remote sales tax collection and remittance software and to institute processes for collecting and remitting remote sales taxes. He indicated that his company was responsible for the tax obligations that they incurred during this seven-month period. He testified that his company had received three notices thus far from states requesting payments on tax obligations from as far back as 2018. He stated that the cost to contest these requests would “far exceed” the cost of settling these requests, even if the requests were incorrect. He testified that his company’s settlements of these types of requests had totaled $140,000 thus far.
• Sen. Hassan then noted how Mr. Hennessey’s company was now paying an additional $40,000 annually to out-of-state governments in miscellaneous new taxes as a result of the South Dakota v. Wayfair, Inc. decision. She asked Mr. Hennessey to discuss all of the different types of taxes that his company was now being forced to pay. She also asked Mr. Hennessey to address how the imposition of $40,000 in additional costs on his company had impacted his company’s profitability.
  • Mr. Hennessey noted how his company had faced new tax obligations from states and localities since the South Dakota v. Wayfair, Inc. decision. He indicated that these taxes went by a variety of names, including franchise taxes, business taxes, business and occupation taxes, and commercial activity taxes. He stated that these new taxes cost his company $40,000 annually and that these new taxes directly reduced his company’s profitability. He commented that these new taxes prevented his company from making investments and benefiting its employees. He highlighted how his company was employee-owned, which meant that reduced profitability adversely impacted employee retirement accounts.
• Sen. Hassan noted how Mr. Hennessey’s company had recently received a notice from California claiming that the company needed to pay California state income taxes as a result of the South Dakota v. Wayfair, Inc. decision. She asked Mr. Hennessey to discuss the legal costs that his company would incur to work through this notice from California (as well as income tax notices from other states).
  • Mr. Hennessey remarked that his company’s legal costs to defend itself against California’s claims could theoretically be unlimited. He noted how his company did not have an attorney on staff, which meant that his company needed to retain a third-party counsel to contest the claims from various states. He mentioned how his company had already incurred costs to research California’s claims against his company. He predicted that his company’s legal costs could exceed $100,000 if a state were to bring their claims against his company to trial.

Full Committee Chairman Ron Wyden (D-OR):

• Chairman Wyden first expressed support for Sen. Hassan’s legislation to prevent out-of-state governments from requiring small businesses to collect taxes retroactively. He then discussed how nexus thresholds varied across states based on types of sales, time periods, and other factors. He asked Ms. Huie to elaborate on how different states determine nexus for the purposes of remote sales tax collections and remittances.
  • Ms. Huie remarked that it was very difficult for small businesses to navigate the economic nexus rules of different states. She noted how these rules tended to vary based on revenue thresholds and the number of transactions. She also highlighted how many companies qualified for physical nexus by virtue of having their products stored in a third-party warehouse. She commented that it was often unclear to many companies that their products were being moved to a third-party warehouse in a given state. She concluded that it was very difficult for small businesses to navigate and comprehend all of these varying rules and underlying factors.
• Chairman Wyden then noted how some localities imposed their own remote sales tax collection and remittance obligations. He asked Ms. Yetter to discuss how remote sales tax collection and remittance obligations from localities imposed additional burdens on remote sellers.
  • Ms. Yetter mentioned how Colorado, Alaska, Louisiana, and Alabama each allowed localities to self-administer their taxes, which led to compliance burdens for remote sellers. She noted how the South Dakota v. Wayfair, Inc. decision had mentioned a centralized administration of all local taxes. She stated that such centralized administration ought to be required before any sales tax collection responsibility could be imposed on out-of-state sellers. She also contended that localities should be required to maintain central registration and administration as a prerequisite for the enforcement of their remote sales tax requirements.

Sen. Steve Daines (R-MT):

• Sen. Daines discussed how the U.S. Supreme Court’s South Dakota v. Wayfair, Inc. decision had forced many small businesses to collect and remit sales taxes to 45 different states. He noted that his state of Montana did not have a sales tax. He remarked however that the vast majority of the state’s businesses were small businesses and were thus adversely impacted by the South Dakota v. Wayfair, Inc. decision. He mentioned how he had joined several other U.S. Senators in submitting an amicus curiae brief in 2018 when the U.S. Supreme Court was considering South Dakota v. Wayfair, Inc. He expressed his belief that the U.S. Constitution provided Congress with the sole authority to regulate commerce amongst the states. He noted how the South Dakota v. Wayfair, Inc. decision posed implications for the TIA, which generally prevents access to federal courts for the purposes of resolving state tax disputes. He commented that the TIA functioned well in an economic environment where small businesses were only subject to taxes in one state. He stated however that the TIA ought to be reconsidered in an economic environment in which small businesses were subject to taxes in multiple states. He asked Ms. Huie to discuss the compliance burdens that her business faced following the South Dakota v. Wayfair, Inc. decision.
  • Ms. Huie discussed how her company now needed to perform audits on a regular basis in order to determine which states that have reached nexus in following the South Dakota v. Wayfair, Inc. decision. She noted how her company needed to register with each of the state departments of revenue where they met nexus thresholds so that the company could satisfy their sales tax remittance obligations. She further noted how her company needed to collect and remit sales taxes from all of the customers in the states where they had economic nexus. She then discussed how her company had to constantly monitor and respond to changing state laws, state sales tax rates, and payment notices from states.
• Sen. Daines noted how Ms. Huie’s testimony had indicated that her company spent $50,000 annually on out-of-pocket technology costs and labor costs to comply with state remote sales tax laws. He asked Ms. Huie to discuss how these costs impacted her company’s profitability and ability to grow, as well as the uncertainty faced by her company.
  • Ms. Huie discussed how e-commerce businesses were constantly purchasing inventory and how it often took months for these businesses to derive profits from their inventories. She stated that her company’s $50,000 remote sales tax compliance expenses thus adversely impacted the company’s cash flow. She also mentioned how her company faced inflation challenges. She noted how her company had not yet increased its prices for its products, which was leading to reduced profitability.
• Sen. Daines interjected to comment that inflation was likely driving up Ms. Huie’s company’s wages.
  • Ms. Huie confirmed that inflation was driving up her company’s wages. She testified that her company had needed to make or evaluate wage increases three times over the previous 18 months.
• Sen. Daines asked Ms. Huie to indicate whether she was aware of other companies having their own adverse experiences resulting from the South Dakota v. Wayfair, Inc. decision.
  • Ms. Huie remarked that many e-commerce sellers were unaware of their remote sales tax collection and remittance obligations stemming from the South Dakota v. Wayfair, Inc. decision. She stated that these sellers could be liable for a significant amount of back taxes, which could force these sellers out of business. She recounted an instance in which a remote seller had been forced to stop their e-commerce business and move the business to Amazon. She noted that this move had resulted in a 35 percent decline in the company’s overall business and had prevented the company’s owner from retiring.

Sen. John Thune (R-SD):

• Sen. Thune noted how the U.S. Supreme Court had issued its South Dakota v. Wayfair, Inc. decision in 2018 and how most states had begun issuing remote sales tax collection and remittance requirements in 2019. He asked Mr. McTigue to address whether the GAO had any data indicating the extent to which these requirements had impacted state and local sales tax revenues during the COVID-19 pandemic. He highlighted how many consumers had been effectively forced to make online purchases during the pandemic.
  • Mr. McTigue noted how his written testimony included a graphic highlighting of how the share of e-commerce relative to total retail sales had spiked during the middle of 2020 (which he attributed to the pandemic). He remarked that there was a long-term trend of e-commerce accounting for a growing percentage of total retail sales and commented that states were reacting to this trend. He stated that businesses were shouldering a “considerable burden” in this new environment.
• Sen. Thune asked Mr. McTigue to indicate whether the GAO possessed a state-by-state breakdown of how much remote sales tax revenue as a percentage of total retail sales tax revenue was being raised by states as a result of remote sales tax collection and remittance laws.
  • Mr. McTigue testified that the GAO did not possess those specific figures at this point. He noted however that the GAO’s aggregate data suggested that state enforcement of economic nexus laws had led states to collect an additional $23 billion in tax revenue.
• Sen. Thune then asked Ms. Huie and Mr. Hennessey to identify the most significant burdens faced by their respective businesses related to the collection and remittance of remote sales taxes. He also asked Ms. Huie and Mr. Hennessey to identify the most impactful action that Congress could take to ease these burdens.
  • Ms. Huie remarked that the out-of-pocket technology cost associated with remote sales tax collection and remittance was a major burden for her company. She also mentioned how her company needed to hire a consulting firm to calculate economic nexus and how her company faced administrative costs associated with complying with remote sales tax collection and remittance laws. She further highlighted how many remote sellers were constantly fearful that they might have unknowingly reached nexus thresholds in a given state, which could subject them to an unexpected tax bill. She expressed support for the establishments of grace periods for phasing in any sales tax rate changes.
  • Mr. Hennessey expressed agreement with Ms. Huie’s comments. He expressed support for providing remote sellers with protections from liability so long as the sellers put forward a good faith effort to comply with remote sales tax collection and remittance laws. He also expressed support for policies that would simplify remote sales tax collection and remittance requirements and protections from taxes beyond sales taxes. He stated that Congress could dictate a single audit that would cover all states for remote sellers. He noted how remote sellers were currently subject to audits from 45 states.
• Sen. Thune then discussed how most states had traditionally imposed sales taxes on tangible goods and noted how many states were seeking to modernize their tax bases to include digital goods and services. He asked Mr. Johnson and Ms. Yetter to identify the area that could present the most complications for state and local jurisdictions extending their sales taxes to digital goods and services. He also asked Mr. Johnson and Ms. Yetter to indicate whether uniform sourcing provisions (similar to the provisions enacted for wireless services) would help to address one of the main concerns in sourcing these transactions for tax purposes.
  • Mr. Johnson testified that the SST agreement maintained uniform sourcing rules that applied to all products (including both tangible and digital goods and services). He also noted how the SST agreement maintained uniform definitions for certain digital products and highlighted how some non-SST member states had adopted these definitions.
  • Ms. Yetter remarked that there remained challenges related to how certain digital goods were defined. She noted how there existed significant uncertainty surrounding the classification NFTs. She expressed support for efforts to further clarify the definitions for digital goods. She also remarked that sourcing was a challenge for digital goods and services transactions. She noted how digital good sales did not require the seller to capture a ship-to address, which made it difficult to define where these goods were sourced from. She stated that these challenges were especially present for digital goods that were used on a multiple employee basis, such as licensed subscriptions. She elaborated that a seller of licensed subscriptions to a company might not know where all of the licensed subscriptions are being used. She commented that it remained unclear as to who was ultimately responsible for obtaining information about the licensed subscription users.
• Sen. Thune mentioned how he had previously introduced the bipartisan Digital Goods and Services Tax Fairness Act, which would have established a national framework to guide state and local taxation of digital commerce.