Virginia Aims to Block Interstate Sales and Use Tax

Published March 1, 2005

Though the Virginia legislature last year voted to raise taxes on Virginians by $1.6 billion, the biggest tax increase in the commonwealth’s history, there was some good news for the state’s taxpayers in 2004.

A less-noticed bill, which gives businesses the opportunity to seek a declaratory judgment remedy in Virginia against tax officials in other states where the business has no physical presence, became law and has been adopted as model legislation by the American Legislative Exchange Council (ALEC).

Virginia State Delegate Tim Hugo (R-Fairfax) introduced HB 1463, which may soon find its way onto lawmakers’ desks across the nation.

Defense Against Other States

Supporters of HB 1463 say it defends against efforts by other states’ tax administrators to collect sales and use taxes from customers in Virginia.

The collection of those taxes across state borders is a goal of the Streamlined Sales and Use Tax Project (SSTP), which seeks to simplify the states’ sales and use tax systems. In March 2000, the National Conference of State Legislatures (NCSL), National Governors Association (NGA), Multistate Tax Commission (MTC), and Federation of Tax Administrators (FTA) joined forces to sponsor the SSTP. Forty-two states and the District of Columbia are involved.

States that adopted the SSTP would collect sales and use taxes for items purchased in their state by out-of-state buyers. Tax collections would depend not on where an item was sold, but instead on where the buyer took delivery. The taxes in place where the buyer was located would apply.

More than Streamlining

Taxpayer advocates, however, do not consider the effort to be a benign project.

Said Grover Norquist, president of Americans for Tax Reform (ATR) in Washington, DC, “The SSTP really is yet another scheme by big spenders to dig deep into taxpayers’ wallets. In the short run, it will lead to the extension of the state sales tax base into areas it has never touched before, and in the long run, to a lack of tax competition and the slow creep upwards in the sales tax burden.”

Pete Sepp, vice president of communications at the National Taxpayers Union (NTU), agreed. “All too many states and localities hope they can enact their ‘Streamlined Sales Tax’ cartel through the back door, by shaking down businesses one at a time. But no matter how this new policy is enacted, taxpayers ultimately lose, by being deprived of the benefits of interstate tax competition and by paying higher prices as businesses pass along their increased collection costs.”

Committed to Tax Sovereignty

Hugo said, “By enacting this declaratory judgment law, Virginia has expressed its firm commitment to tax sovereignty and the limits of the Interstate Commerce Clause. To the extent the effort to pass a national sales tax collection scheme is premised on completely opposite values, the law I sponsored certainly runs counter to its guiding policy.

“My law supports tax boundaries, small businesses, and taxpayers, and promotes Internet commerce, while the national sales tax collection proposal erases tax boundaries and burdens businesses and taxpayers,” he said.

A 1992 U.S. Supreme Court ruling held that a state may not require retailers without nexus (a physical presence in the state) to collect sales taxes for the state. Absent such a nexus, requiring retailers to collect taxes for the state was considered an undue burden on interstate commerce, and thus a violation of the Constitution.

Yet, in the context of the SSTP’s attempt to establish uniform definitions for taxable goods and services, tax administrators in some states are currently pressing businesses with no “bricks and mortar” presence to collect sales and use taxes on their behalf.

Blocking Big Spenders

HB 1463 establishes a statutory right for businesses incorporated in Virginia to bring a lawsuit in Virginia’s courts seeking a declaratory judgment on whether the business can be required to collect sales or use taxes for another state without violating the Commerce Clause of the U.S. Constitution.

The assumption behind the bill is that a local court would be likely to rule in favor of a Virginia-based business that has no clear physical presence in another state. Once a court has determined there is no nexus, that determination has to be honored by sister states under the “full faith and credit clause” of the U.S. Constitution.

“Essentially, the measure blocks one way by which insatiable big spenders reach into taxpayers’ wallets, by giving business the opportunity to seek protection under the U.S. Constitution,” Norquist said.

Benefits for Small Businesses

Karen Kerrigan, executive director and CEO of the Small Business and Entrepreneurship Council, reflected on the benefits of the legislation for small businesses.

“Small businesses already face exorbitant compliance burdens in terms of taxation,” Kerrigan said. “Under this law, they can now get a judicial determination in an unbiased forum without the burden of litigation in a distant place. If the court rules in their favor, they are freed from the burden of compliance cost.

“Essentially, this will improve Virginia’s small business climate by attracting interstate sellers to locate their operation entirely in the state.”

Lee E. Goodman, an attorney for Time Warner and America Online, said the law is important to Virginia businesses and “particularly its information technology industry, which faces increasing efforts by tax administrators in other states to tax and regulate Virginia’s economic investments and successes. This law will be very useful for any business that faces an unfair tax assessment by another state.”

ALEC has adopted the bill as model legislation and has been promoting it in other states.

Increasingly Aggressive Taxers

According to Michael Keegan, director of the ALEC Tax and Fiscal Policy Task Force, out-of-state tax collectors are becoming more aggressive in demanding sales and use taxes from businesses that may not have any physical connection with those states.

“The Virginia law provides in-state retailers an important new tool to protect themselves from unfair and costly litigation with out-of-state tax administrators by providing declaratory relief to determine if that business meets the nexus standard to collect and pay taxes,” Keegan said. “The ALEC model would afford this same protection to business owners across the country.”

Pro-taxpayer organizations like ATR and NTU hope the Virginia model will convince state legislators in other states.

“How ironic that in an age where the global economy is expanding every day, some government officials here at home would impose a new tax regime to choke the flow of goods and services within the United States itself,” Sepp said. “True taxpayer advocates in state legislatures across America should follow Virginia’s lead and stop these tax trespassers in their tracks.”

Similar Bill in Kansas

The issue clearly is on the radar screen in many states. Kansas Speaker of the House Doug Mays (R-Topeka) thinks the issue will be on the agenda this year.

“I expect Kansas to take up the nexus enforcement issue,” Mays said. “As a state, we have struggled under the heavy burden that the ‘streamlined’ sales tax project has been to our businesses and taxpayers. The project continues to become more complicated and expensive with each passing day.”

Sandra Fabry ([email protected]) is state government affairs associate with Americans for Tax Reform.