House Approved Bipartisan IRS Reform Package, (Apr. 19, 2018)

The House on April 18 approved the two largest bills of a bipartisan IRS reform package. The bills aim to restructure the IRS for the first time in 20 years. The 21st Century IRS Bill (HR 5445) was approved 414-to-0 and the Taxpayer First Bill (HR 5444) passed by a 414-to-3 vote.

The bipartisan reform package-lead bill, HR 5444, proposes changes to the IRS’s appeals process, customer service programs, and would implement other organizational restructuring. HR 5445 focuses primarily on cybersecurity safeguards.

Bipartisan IRS Reform Package

In addition, the House approved seven bills by unanimous consent on April 17. These bills are also set to become part of the bipartisan IRS reform package. The House-approved bills are HR 2901, HR 5440, HR 5438, HR 5446, HR 5437, HR 5439, and HR 5443. The measures include proposals to establish a single point of contact for tax-related identity theft victims, expand the use of Low-Income Taxpayer Clinics (LITCs), and require electronic filing for certain tax-exempt organizations, among other things. The entire package of bills was approved by the Ways and Means Committee last week.

“With this package, we are taking a monumental step in redesigning the IRS for first time in 20 years, refocusing the agency to live up to its mission of quality service, and reining in its enforcement powers to prevent future abuse,” Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an April 18 statement.

IRS Glitch

House passage of the IRS reform bills comes on the heels of an IRS system glitch on April 17, the last day of the 2018 filing season. The IRS released a statement that evening, announcing that the systems were fixed and that taxpayers would have until midnight on April 18 to file their returns.

Senate

How the IRS reform bills will fare in the Senate remains to be seen. Although Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah has commended the House’s efforts toward restructuring the IRS, no word has been released as for when the Senate will consider the measure.

State Tax Day – Current, S.1, All States—Sales and Use Tax: South Dakota v. Wayfair: Will the Court do Anything with Quill? 

The U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc., Docket No. 17-494, on April 17, 2018. In the course of the arguments, the justices seemed to leave no stone unturned.  Many questions concerned the effect on small businesses of keeping Quill Corp. v. North Dakota , 91-0194), 504 U.S. 298 (1992) in place versus overturning it.  Another recurrent theme was whether Congress, not the Court, should take action to address the physical presence standard in Quill.

The justices are expected to rule on the case by late June.

Small Businesses: Compliance Costs

Wayfair argued that the costs for small businesses in complying with sales tax collection in the absence of Quill would hurt small businesses. The justices expressed some skepticism on this point. Justices Sotomayor and Breyer were not convinced that the data given in the briefs gave a clear financial picture of what compliance costs would look like. Justice Gorsuch asked for information on which is more of a burden for small businesses, complying:

       with sales tax collection in many jurisdictions; or

       use tax notice requirements like those in Colorado?

Justice Ginsburg even mentioned tax compliance software as a solution for small businesses.

In addition, Justices Kagan and Ginsburg touched on the argument that the physical presence standard puts small, in-state businesses at a disadvantage because they must pay and collect tax. Removing the standard, however, would also harm small businesses if they wanted to maintain or expand their markets into other states. The increased cost of sales tax compliance would, arguably, be highly prohibitive to these small businesses.

Congress Should Address the Issue

Much of the questioning for South Dakota implied Congress should take action on this issue and not the Court. The justices questioned whether South Dakota’s issue actually concerned a change to the physical presence standard or its inability to collect use tax. Further, if a change to the standard is in order, Congress should set the standard for nexus.  Justice Breyer pointed out that Congress can act to address the issue in Wayfair. Quill was not a constitutional decision that required the Court’s intervention.

Justice Roberts wanted to know what the “constitutional minimum” would be for imposing sales tax collection rules on out-of-state sellers. South Dakota responded that there would be none if an exception to Quill were made for internet sales, but that a minimum standard would be a good idea. Justice Kagan noted that a need for a constitutional standard for nexus is essentially why the Court should leave the question for Congress. Further, if the Court did overrule Quill, where would the states’ incentive be to encourage Congress to create a minimum standard?

Wayfair did not disagree that Congress should take action on the issue. However, it argued that Quill should be left alone. Even if the physical presence standard in Quill were wrong, thousands of companies have structured their businesses relying on Quill.

What Will the Court Decide

Overturning Quill  could invite compliance chaos as suggested by Wayfair, but it could also equalize sellers who exploit the market in the state.

Either way, it appears everyone hopes Congress will step in and provide guidance.

Transcript of Oral Arguments for South Dakota v. Wayfair, Inc., Docket No. 17-494, U.S. Supreme Court, April 17, 2018