Gov. Chris Sununu unveiled a proposal to push back against states seeking to collect internet sales tax from New Hampshire businesses Thursday, following through on a pledge to stand against a sweeping U.S. Supreme Court decision last month.
At an information session for New Hampshire lawmakers in Concord, representatives from the attorney general’s office, governor’s office, Department of Business and Economic Affairs, and Department of Revenue Administration presented a draft piece of legislation they said would protect companies in the state from unconstitutional taxes following the decision.
The proposed bill would require all states looking to collect sales taxes from a New Hampshire business that shipped to one of their customers to submit written notice to New Hampshire’s attorney general beforehand. The attorney general would then have 90 days to review the request and decide whether to allow it, open an investigation, or bring legal action to stop the tax from being collected.
Companies that found it more advantageous to comply with the sales tax rather than fight it could do so, the law adds, provided they give notice.
The effort comes down to basic fairness, the draft legislation argues.
“New Hampshire’s decision not to enact a traditional sales and use tax law reflects a strong governmental interest to encourage the establishment and expansion of small and ‘micro-businesses’ that represent a particularly valuable segment of New Hampshire’s economy,” the proposed bill states in its preamble. “The high cost and practical difficulty of compliance with sales and use tax requirements would disproportionately and negatively impact these businesses and discourage other aspiring entrepreneurs from starting new businesses in New Hampshire.”
The legislation comes in the wake of a jolt for sales-tax-free states.
Last month, in the case of South Dakota v. Wayfair, the court ruled, 5-4, that companies that ship their products could no longer rely on geography to exempt themselves from other states’ sales taxes. Previously, companies not physically present in a state they shipped products to could be excused from collecting and paying the sales tax of that state. That criteria was upheld by Supreme Court decisions in 1967 and 1992, and relied on by states for decades. The idea was that physical presence was key to establishing that the business had a “substantial nexus” with the state – the status necessary to subject them to tax.
But in last month’s decision, authored by outgoing Justice Anthony Kennedy, the majority decided to overturn those decisions, finding that physical location was not necessary to establish a substantial nexus for tax purposes. The rule gave unfair preference to states without sales taxes, like New Hampshire, at the expense of needed revenue sources for states like South Dakota, Kennedy wrote.
“Quill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers,” Kennedy wrote, referring to the 1992 case of Quill Corp v. North Dakota. “Remote sellers can avoid the regulatory burdens of tax collection and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own.”
Now, South Dakota and others have a green light to establish their sales taxes, but much remains up in the air. While the Supreme Court issued some guidelines for future cases, the “substantial nexus” requirement still holds. Defining which businesses will fall under it, and thus face outside taxes, will likely require lawsuits to test the new precedent. Even the exact fate of South Dakota’s law has been remanded back to its state’s supreme court.
That’s where New Hampshire’s proposed legislation comes in, members of the Sununu administration said Thursday. By outlining a series of specific steps states will have to follow to collect tax, the law will allow the state’s attorney general to oversee each request, and take legal action if it deems the requests unreasonable.
“(It’s an) attempt to lay the groundwork for developing the law,” said John Formella, counsel to the governor. “One of the things that we’re going to see in the coming years is that if Congress doesn’t act, the law will develop gradually through omission. Part of the point of this statute is to allow the Department of Justice to take a leading role in that.”
The draft presented Thursday is not necessarily the final word on legislation. A legislative task force is convening over the next week to fine tune it, and the general court has scheduled a special session on July 25 to vote on the final legislation.
Speaking at the briefing Thursday, Attorney General Gordon MacDonald said the need for the bill was a matter of integrity.
“New Hampshire has a long and proud history of frugality and limited taxation,” he said. “New Hampshire has a very strong interest as a sovereign in maintaining the advantage that it possesses as a state with a very unique tax structure including an absence of a retail sales tax.”