Retroactivity is a serious threat to all taxpayers, and especially out-of-state businesses with no real recourse in court or at the ballot box.
The Online Sales Simplicity and Small Business Relief Act of 2018 introduced by Congressman Jim Sensenbrenner (R- Wis.), Congresswoman Anna Eshoo (D-Calif.), Congressman Jeff Duncan (R – SC) and Congresswoman Zoe Lofgren (D-Calif) prevents retroactive taxation, establishes an orderly phase-in of compliance obligations, and provides a $10 million exemption for small business sellers, that lasts until the states produce a compact that Congress approves to simplify collection to the point where no small business exemption is necessary.
At a Judiciary Committee hearing on life after the South Dakota v. Wayfair decision, Grover Norquist and Congresswoman Pramila Jayapal (D- Wash.) had a heated back and forth over the status of Washington State’s retroactive tax practices. She emphatically stated that “Washington state law does not allow for retroactive taxation on this issue.” Norquist was answering a question about the general propensity for states to tax retroactively, for online sales or otherwise, and sited an instance where Washington state pursued 27 years of retroactive taxes on Dot Foods after reclassifying a product into a new taxable category. The court recognized and upheld retroactive application of the amendment for 27 years, but justified it by saying that in practice it only affected the taxpayer, Dot Foods, for 4 retroactive years in Dot Foods v. Washington Department of Revenue. The court seems very supportive of retroactive taxes: “Furthermore, there is no ‘absolute temporal limitation on retroactivity.’”
However, at the time of the hearing, Washington state was actively pursing retroactive taxes for online sales. The Supreme Court did not hear the Wayfair case until April 17, 2018, and it was not decided until June 21, 2018. But Washington passed their online sales tax collection law on July 7, 2017 which required collection to begin January 1, 2018. They are now pursuing retroactive taxes from the time of the Supreme Court Decision to January 2018 even though the Quill physical presence standard was still the law of the land. Another remote seller nexus bill from 2017 applied retroactive taxes for all of 2015.
South Dakota did not begin tax collection before the Court heard their case, and the Supreme Court noted that non-retroactive tax collection was an important part of South Dakota’s legislation. Without Congressional clarification against retroactive tax collection other states, Massachusetts being one, will pursue retroactive taxes.
The following can be attributed to Grover Norquist, president of Americans for Tax Reform:
“After the Supreme Court’s decision in Wayfair which told all Americans ‘yes—you now can be taxed by politicians you do not elect and who act knowing you are powerless to object.’ The Wayfair decision opens the door to taxation without representation not just on sales bust also on individuals, property and business income. Anything that limits the ability of one state to abuse taxpayers in another state is welcome.”