Capital Beat: Wanted: A Plan B for online sales tax legislation 

Monitor staff
Published: 8/18/2018 7:47:24 PM

It took mere minutes last month for the House to strike down a long-anticipated proposal by Gov. Chris Sununu to protect New Hampshire businesses from online sales taxes. Weeks later, the Legislature is still struggling to come up with a replacement.

After the House stripped away major pieces of a bill crafted by House and Senate lawmakers and reduced it to a study committee, the Senate quickly moved to pull the plug entirely, voting the remnants down. Emotions were high. An exasperated Senate President Chuck Morse urged his colleagues to keep their calendars open, keeping observers guessing as to what the chamber might string together next.

Two months after the Supreme Court issued the decision that could open up Granite State businesses to the threat, few alternative proposals have emerged. Though House and Senate lawmakers say legislation is being discussed, little has been unveiled.

Now, two Republican representatives say they’ve found a new – and bold – solution. Reps. Jess Edwards of Auburn and Kevin Scully of Nashua are crafting a bill that would challenge the whole foundation of the Supreme Court’s decision. And they say they’re picking up support.

“I think that we should draw a clear line in the sand to say that we are on clear constitutional grounds to protect our New Hampshire advantage,” Scully said. “We’re a sovereign state. We have made decisions here as to how we want to structure our society and government. And we’ve decided not to impose sales taxes.”

To recap: In a June decision, the Supreme Court overturned a decades-long precedent preventing states from imposing sales taxes on out-of-state businesses that ship to their residents. The decision, South Dakota v. Wayfair, appeared to open the floodgates for businesses in states without sales taxes, like New Hampshire. Once immune to other jurisdictions’ tax codes, online shippers at New Hampshire retailers could now be subject to all of them.

Amid the uncertainty, Sununu attempted to work with lawmakers to fight back quickly, arriving at a proposal that would create a cumbersome registration process for jurisdictions looking to impose sales taxes, and allow New Hampshire’s attorney general to start legal action against those that violated that process.

The proposal crafted by Scully and Edwards would go farther. It would retain allowing the attorney general to sue, but in place of registration, the statute would make one thing explicit: any out-of-state taxing is against New Hampshire’s constitution and unlawful.

The new idea is, to some extent, a reaction to what many in the House groused was a poorly conceived plan by the governor. To Scully, the major failing of the last proposed bill was foundational. Instead of putting to use New Hampshire’s constitutional safeguards, he argued, the proposal pushed them aside.

The two are betting that the strong vote against the governor’s plan could give their proposal momentum.

“They were inviting other outside foreign taxing authorities to make their arguments to say why they would have the right to be able to ask our businesses to collect their taxes,” Scully said. “I thought that was a terrible mistake.”

During the crafting of the original bill, carried out over a days-long public workshop session, top House and Senate lawmakers had a different approach. Rather than outright oppose the practice of out-of-state sales tax collection, the proposed legislation would have facilitated it, albeit through a convoluted process intended to act as a deterrent to all but the most determined of jurisdictions. The idea? The state can’t stop the requests, but it can help manage them.

But to Edwards and Scully, that’s a backwards mindset. By creating such a process, they argue, the state is tacitly admitting that the taxes are constitutional.

In crafting their alternative, Scully and Edwards are relying on a host of state and federal constitutional provisions, starting with New Hampshire’s Bill of Rights. Article 12 protects New Hampshire residents from having property taken without their consent, and says that no residents are “controllable by any other laws than those to which they, or their representative body, have given their consent.”

Article 7, meanwhile, makes that more clear: “The people of this State have the sole and exclusive right of governing themselves as a free, sovereign, and independent State.”

Then there’s the U.S. Constitution, whose Interstate Commerce Clause and Privileges and Immunities Clause bolster their argument, they say.

And the lawmakers have a separate argument, one they think could flip the issue on its head. Their legislation would emphasize that when out-of-staters buy from sellers whose physical presence lies in the Granite State, any time a buyer goes online they are effectively traveling – virtually – to New Hampshire. Through that lens, all transactions from with New Hampshire businesses are exempt from sales taxes, as if the buyers had driven across the border themselves.

Putting that interpretation into state legislation is the best way to create a bulwark, they argue.

“I think it’s absolutely brilliant,” Scully said of the idea, which came from Edwards. “And I think it’s correct.”

Of course, little of this is consistent with the Supreme Court ruling. In his majority opinion, Justice Anthony Kennedy wrote that the primary test for whether a state can tax an out-of-state business – following the Commerce Clause – is not where the store was located, but where the item was shipped. Speaking on South Dakota, the state looking to impose the tax in the Wayfair case, Kennedy wrote: “All agree that South Dakota has the authority to tax these transactions.”

To the two representatives, however, defying a Supreme Court decision is sort of the point. The strategy, they think is to plant New Hampshire’s foot as firmly in the ground as possible.

In making the bet, they argued that they could win in a rematch in the court. For one, the facts of the case are different: a court fight involving New Hampshire would likely not center on multi-state behemoths like Wayfair, but on small businesses, making the issue one of state sovereignty. Secondly, Kennedy resigned earlier this summer; his proposed successor, Brett Kavanaugh, could be more sympathetic to a state sovereignty-oriented interpretation of the Commerce Clause.

But in order to test that idea, and push the courts in that direction, Edwards and Scully argue, the state needs to first take a strong stand.

Whether the two can get the Legislature behind them is an open question. Ahead of last month’s vote, the influential conservative House Freedom Caucus urged a no-vote in favor of an approach similar to Edwards’s and Scully’s – one that would create a firm wall rather than a regulated door.

But while a majority in the House voted to defeat Sununu’s proposal, the no-voters were hardly in ideological lockstep on why. Some wanted the state to take no action at all, finding the prospect of fighting back frivolous and likely counterproductive.

And others in House and Senate leadership are less enthusiastic about a confrontational approach. Still
to be seen: how last month’s revolt might change their mind.

Senate Majority Leader Jeb Bradley, R-Wolfeboro, applauded the bold approach, saying he agreed with it philosophically. But he added that his support for any proposal is dependent on how likely it could prove victorious in court. An open-ended challenge with little chance of success, he said, would not clear the bar.

“I think it’s great that they’re proposing something that’s pretty aggressive,” he said. But: “I don’t want to do something and be told at the same time that there’s almost no chance that it survives a Commerce Clause challenge.”

Meanwhile, with little in the way of concrete action, the outlook for any replacement bill to be introduced before the start of next session in January – on the House and Senate “veto day” this Sept. 13, for example – appears unlikely. For now, New Hampshire businesses will have to sit tight.

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