Rep. James Sensenbrenner’s No Regulation Without Representation Act of 2017 is a direct challenge to states such as Massachusetts, Alabama and South Dakota that are seeking to force sales tax collection from larger e-retailers.

Many states have been trying to force larger online retailers to collect sales tax, despite the prevailing federal law that only requires tax collection by retailers with a physical presence within their states. Some states have passed laws that expand what constitutes physical presence—or “nexus” in legal terms—to include receiving traffic from an affiliate in a state or dropping cookies on the browsers of state residents. However, a bill introduced in Congress would put a stop to those ploys.

Rep. James Sensenbrenner (R-Wisconsin) has introduced a bill that would explicitly prohibit states from creating new definitions of nexus that would require retailers to collect sales tax in states where they lack a physical presence, such as a store, office or warehouse.

A number of online retailers were quick to support the legislation. “As a remote retailer of colored gem stones and jewelry, JTV supports this bill because it will put a stop to the onslaught of out-of-state legislation and regulation designed to regulate interstate sales without representation and without nexus,” says Charlie Wagner, vice chairman of Jewelry Television, No. 216 in the Internet Retailer 2017 Top 500. “This growing patchwork of state level laws and regulations undermines interstate commerce and further development e-commerce which is so important to our nation’s economy.”

The Sensenbrenner bill, which is called the No Regulation Without Representation Act of 2017, draws strict guidelines on what constitutes a physical presence in a state. Those are:

  • Maintaining a commercial or legal domicile in the state;
  • Owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation or assembly facility in the state;
  • Leasing or owning tangible personal property (other than computer software) of more than de minimis value in the state;
  • Having one or more employees, agents or independent contractors present in the state who provide on-site design, installation, or repair services on behalf of the remote seller;
  • Having one or more employees, exclusive agents or exclusive independent contractors present in the state who engage in activities that substantially assist the person to establish or maintain a market in the state; or
  • Regularly employing in the State three or more employees for any purpose.

That narrow definition would explicitly prohibit states from requiring retailers to collect sales tax based on other definitions they draw up. In doing so, the bill reinforces the landmark 1992 U.S. Supreme Court ruling in Quill Corp. v. North Dakota that prohibits states from requiring merchants to collect taxes unless they have a physical presence in the state.

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Massachusetts, Colorado, South Dakota and Alabama have each recently challenged prevailing federal law by requiring retailers to either collect and remit sales tax to their states or to turn over residents’ purchase information to state authorities. Last December, the U.S. Supreme Court let stand the Colorado law that requires internet retailers to report purchases by residents to the state.

Consumers are legally obligated to pay sales tax to their home state when they purchase online, but few pay it if the retailer doesn’t collect it at checkout. With e-commerce sales growing, a number of states have enacted legislation and filed lawsuits to make e-retailers pay up.

“[The bill] addresses efforts by some aggressive states to impose regulation without representation, including in the online sales tax arena, though the bill is much broader than that specific context,” says Bob Goodlatte (R-Virginia), the influential chairman of the House Judiciary Committee who is a co-sponsor of the bill. “The bill is entirely consistent with the proposals put forth by the committee to address the online sales tax issue, which also prevents regulation without representation. I look forward to exploring its merits at the committee level, and to continuing to look for a solution to the online sales tax issue.”

The No Regulation Without Representation Act of 2017 offers a “common sense” approach to “put a stop to the chaos” going on in the various states, says Steve DelBianco, executive director of NetChoice, a national trade association representing online retailers.

“States should not be allowed to regulate businesses beyond their borders, whether it is imposing sales tax obligations, labeling, or other regulatory restrictions and mandates on business that are not located within their borders,” he says. “Congress must step in to stop this madness.”

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Overstock.com Inc. board member Jonathan Johnson agrees that Congress needs to act.

“States want remote internet retailers to collect at the rates for the customers’ residences and not at the cash register,” he says. “This significantly complicates things. Under the states’ schemes of collecting at each customer’s residence, a remote retailer faces a morass of more than 12,000 state and local tax districts—all with special, ever-changing provisions, and each with individual audit authority. Imagine being subjected to 12,000 tax audits!”

Overstock is No. 29 in the Top 500.