NH heads to the ramparts in online sales tax fight
Small businesses sound alarm over U.S. Supreme Court ruling
In uncharted legal waters, it’s full speed ahead.
The Executive Council at its July 11 meeting wasted no time in approving by a 4-1 vote Gov. Chris Sununu’s call for a special legislative session to consider proposals that might shield New Hampshire companies doing online and mail-order businesses from collecting taxes for other states.
In its June 21 ruling in South Dakota v. Wayfair, the U.S. Supreme Court held that businesses selling by mail order or the internet may be required to collect and remit to taxing authorities in other states the sales or use tax due on sales made to customers in those jurisdictions. The high court overturned previous rulings of 26 and 51 years ago, which held that a remote seller must have a physical presence or a “nexus,” such as a sales agent or contractor, to be subject to a sales or use tax on sales to customers in another jurisdiction.
The decision set off an alarm in New Hampshire and four other states (Alaska, Delaware, Montana and Oregon) with no sales tax. Businesses doing remote sales from any location may be subject to the task of collecting and remitting to a yet undetermined number of states, counties and municipalities that may try to collect revenue from businesses located beyond their borders. New Hampshire Attorney General Gordon MacDonald has drafted a bill to present to the Legislature at the July 25 special session.
Executive Councilor Andru Volinsky, an attorney and a Democrat, cast the lone vote against the session, arguing that it was premature.
“We can expect that 40 or so other states will react” to the Supreme Court decision, Volinsky said. “That will not happen before July 25th,” suggesting the state should “wait and see how other states react.” Volinsky also warned of unintended consequences that could result from legislative efforts to shield New Hampshire businesses from anticipated tax collection responsibilities.
“The proposal seems designed to interfere with other states’ tax collections in New Hampshire,” Volinsky said, warning that if that effort fails, New Hampshire businesses that have not paid the taxes due may be subject paying back taxes plus penalties assessed for noncompliance.
“That’s exactly why we need to move quickly,” Sununu said, to allow lawmakers “to act on the recommendations” that will come before the special session.
U.S. Sen. Maggie Hassan has joined with her fellow Democrat, U.S. Sen. Jeanne Shaheen, in sponsoring the Stop Taxing Our Potential Act, which would restore the physical presence rule that the Supreme Court has thrown out.
According to Republican Executive Councilor Joe Kenney, small businesses in the North Country with online sales fear the effect the added costs and administration of collecting taxes for out-of-state jurisdictions will do to their businesses. The Legislature needs to act to “send a signal to the rest of the country,” Kenney said.
“It has the potential of being a business-ending deal for us,” said Kathie Cote, co-owner with her husband Dennis of Polly’s Pancake Parlor in Sugar Hill.
While their restaurant is the mainstay of their business, Cote estimates about 20 percent of their overall revenue comes from online or mail-order sales of pancake mix and maple syrup to out-of-state customers.
“Profit-wise, it’s much smaller,” she said, noting that the added cost of packing and shipping already cuts sharply into the margin of profit. Collecting and remitting taxes on the sales would add further costs.
“If it gets to be cost-prohibitive, we won’t do mail-order business anymore,” Cote said.
The South Dakota law the Supreme Court upheld imposes tax collection and remittance obligations on a remote seller doing $100,000 of business or making 200 or more transactions with South Dakota customers in any one year. Polly’s Pancake Parlor and most other small businesses in New Hampshire don’t make that many sales to any one state, but the court’s decision did not stipulate that such a threshold on the volume or number of sales would be required for a state to collect taxes from businesses located outside its borders.
“Who knows what the other 45 states are going to do? “ said Kenney.
In 2016, South Dakota enacted legislation requiring out-of-state sellers to collect and remit sales taxes to the state “as if the seller had a physical presence in the state.” The state sought a declaratory judgment upholding the validity of the law and an injunction requiring three out-of-state companies — Wayfair Inc., Overstock.com and Newegg Inc. — to collect and remit taxes on their sales to South Dakota customers.
The trial court ruled in favor of the companies and the state Supreme Court upheld that decision, citing the Supreme Court’s previous “physical presence” rule. But in the opinion of the Supreme Court’s 5-4 majority, now-retired Justice Anthony Kennedy wrote of “the complexities of defining physical presence in the Cyber Age. For example, Massachusetts has proposed a regulation that would have defined physical presence to include making apps available to be downloaded by in-state (Massachusetts) residents and placing cookies on in-state residents’ web browsers.”
Elsewhere in the same opinion, Kennedy wrote, “a company with a web site accessible in South Dakota may be said to have a visible presence in the state via the customers’ computers.” A rule that “allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust,” Kennedy wrote.
The court remanded the decision to the Supreme Court of South Dakota “for further proceedings not inconsistent with this opinion.”
A report by the U.S. Government Accounting Office last November cited the “labor-intensive” technological and administrative duties required if remote sellers are required to collect and remit sales taxes to every jurisdiction in which they sell. Acquiring the software needed to map and code all of the company’s products to the various taxing categories would be part of the cost. Licensing fees, administrative costs and “options for premium services, such as preparing or automatically filing tax returns” are other factors.
The GAO cited estimates of tax policy specialists that the number of tax jurisdiction in the United States is between 10,000 and 12,000, with varying rates of taxation and differences on what items are taxed and which are exempt:
For example, apparel is treated differently across states. Pennsylvania exempts clothing, except for formal apparel; items made of real, imitation or synthetic fur; and athletic apparel. Across the border, New York state exempts clothing sold for less than $110; however, some jurisdictions do not apply these exemptions and charge a local sales tax on these items.
In New Jersey, knitters pay sales tax on yarn purchased for art projects, but not on yarn earmarked for sweaters. Texas taxes sales of plain deodorant at 6.25 percent but imposes no tax on deodorant with antiperspirant. Illinois categorizes Twix and Snickers bars — chocolate-and-caramel confections usually displayed side-by-side in the candy aisle — as food and candy, respectively (Twix bars contain flour; Snickers don’t), and taxes them differently.
“The burden will fall disproportionately on small businesses,” Chief Justice John Roberts wrote in his dissent. “People starting a business selling their embroidered pillow cases or carved decoys can offer their wares throughout the country — but probably not if they have to figure out the tax due on every sale.”
Such entrepreneurs might find little consolation in Justice Kennedy’s response to those “daunting complexities.”
“Eventually,” he wrote, “software that is available at a reasonable cost may make it easier for small businesses to cope with these problems, either from private providers or from state taxing authorities themselves.”
“The keyword there is ‘eventually,’” said Nancy Kyle of the NH Retail Association.
The organization does not take a position on the issue, said Kyle, since some of the large brick-and-mortar chain stores that are already collecting and remitting taxes in other states are in favor of the court’s decision while smaller, New Hampshire-based businesses are for the most part opposed.
The smaller businesses “have no infrastructure in place to collect taxes in other states,” she said. “As a state we make our decision to balance our budget without a sales tax. Now you’re asking New Hampshire businesses to collect sales taxes to help other states balance their budgets.”
Jeff Bart, owner of Granite State Candy Shoppe, a business started by his grandfather in 1927, supplements the income from his stores in Concord and Manchester with online sales nationally, as well as to customers in Canada, Europe and Japan. He estimates his remote sales make up 20 to 25 percent of his overall business.
“Logistically, it’s going to be a nightmare,” he said. “Even if I am able to find the software or software service that will help me determine the correct tax and so forth, it will have to be integrated with my website, and there will be implementation costs. There will be ongoing management issues that will need to be addressed as well. I wear a lot of hats here. I can’t risk doing something like this myself, I’d have to pay someone who knows how to do it.” Bart estimates it would add between $5,000 and $10,000 a year to his annual cost of doing business.
The Dorr Mills Store in Newport offers a variety of yarns and fabrics on the “Shop Online” portion of its web site. Owner Terry Dorr estimates that about 15 percent of his overall business comes from online sales. He wonders how he would cope with sales taxes if a state were to require collection without the $100,000 or 200 transactions threshold in the South Dakota law.
“It’s difficult to imagine how challenging that would be. With a particular state, you could have dozens of different taxes, depending on counties and municipalities. Even though the Supreme Court has authorized that they can do this, I would think the enforcement would be pretty equally challenging,” Dorr said. “It has opened up a can of worms, that’s for sure. “
A matter of time
At the special session, Legislators will be asked to enact a law that will establish a minimum volume of sales before a New Hampshire vendor can be subject to another sales tax from another jurisdiction and will include an exemption for small businesses. It would also require tax collectors to obtain a written determination from the NH Department of Justice that their collection efforts conform to the New Hampshire law.
The attorney general would be authorized to file a lawsuit to block tax collections in violation of New Hampshire law. Issues raised might include the placing of an under burden on interstate commerce or the denial of due process to New Hampshire vendors, said John Famella, the governor’s legal counsel.
Meanwhile, South Dakota is currently prevented from enforcing its remote seller taxation law because a state Circuit Court injunction remains in effect, according to a posting on the state’s Department of Revenue website.
Wade Laroche, the department’s public affairs manager, said the state anticipates that the injunction will be lifted in light of the Supreme Court’s decision. “But at this time we don’t know what the implementation date will be,” he added.
Regarding New Hampshire’s plans to block tax collection efforts of other states, Laroche said, “We’re aware of what no-sales-tax states are going to do and it’s within their legal right to do so.”
Vermont’s law, written in anticipation of the Supreme Court ruling, took effect as soon as the high court did away with the physical presence rule, said Tax Commissioner Kaj Samson. “I think we understand that, in particular, small to middle-sized vendors are facing an uphill battle in getting up to speed on tax collection in multiple states,” said Samson, adding, “we don’t anticipate any aggressive collection effort in New Hampshire” at this time.
Vermont‘s law has the same threshold as South Dakota’s. Out-of-state vendors will be required to register with the state, obtain a vendor’s license to sell in Vermont and collect and remit the taxes due on sales exceeding $100,000 or on 200 or more transactions with its Vermont customers.
“As we perceive it, we don’t have any discretion,” said Will Baker, special counsel to the Department of Taxes. “The law is clear, the effective date is clear and the (decision of) the Supreme Court is clear. It’s mechanical at this point.”
At the federal level, New Hampshire’s U.S. senators, Jeanne Shaheen and Maggie Hassan, have been joined by two fellow Democratic senators, John Tester of Montana and Jeff Merkley of Oregon, in introducing the Stop Taxing Our Potential (STOP) Act, which would restore the physical presence rule that the Supreme Court has thrown out.
In the bill, physical presence is defined as owning or leasing real estate, such as a store, office or warehouse, or maintaining one or more employees in the taxing jurisdiction. Shaheen led the fight in the Senate in 2011 to a bill, called the Marketplace Fairness Act, that would have authorized sales-tax collections against out-of-state vendors, with or without a presence in the taxing jurisdiction. The bill passed the Senate but died in the House.
“This is a disastrous decision for New Hampshire’s economy,” Shaheen said in a press release following the Wayfair ruling. “New Hampshire small businesses do not have the time or resources to become tax collectors for other states.”
Hassan voiced a similar reaction in a telephone interview with NH Business Review.
“What I think you saw in this particular Supreme Court decision is an opportunity for Congress to step forward and settle this legislatively,” said Hassan.
Conceding it will be “a tough battle to get it passed,“ the senator predicted it would gain the support of small-business people beyond the borders of New Hampshire and the four other states that have no sales tax. “This is a concern to small businesses throughout the country,” she said.
Whatever action Congress might take on the measure, it will probably not be swift, said the governor’s legal counsel. “I think everyone agrees that if we wait for Congress to act, we could be waiting quite a while,” Famella said.
Following the Executive Council meeting, Sununu underscored his decision not to wait.
“The Supreme Court got it wrong,” he said. “We’re going to protect New Hampshire businesses.”