Brady releases bare-bones Tax Cuts 2.0 outline. Tax News & Views Capitol Hill briefing. July 27, In this issue:

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1 Tax News & Views Capitol Hill briefing. In this issue: Brady releases bare-bones Tax Cuts 2.0 outline... 1 House votes to repeal medical device tax, relax HSA rules... 4 Finance Dems vent over donor disclosure changes at Treasury nomination hearing... 7 Nunes releases bill to index capital gains to inflation... 9 Little consensus on legislative next steps post-wayfair Brady releases bare-bones Tax Cuts 2.0 outline House Ways and Means Committee Chairman Kevin Brady, R-Texas, on July 24 released the outline of a three-pronged plan to permanently extend the tax relief for individuals and small businesses included in last year s massive tax cut law (P.L ), as well as to enact new incentives to encourage individuals to save for retirement and other expenses and to spur new business innovation. But the outline provides few substantive details on the proposals that will be included in the eventual plan informally dubbed Tax Cuts 2.0 or how they will operate. URL: Brady stated in a news release that the plan will be refined as Ways and Means Republicans engage in a series of listening sessions with rank-and-file GOP House members that began this week and will continue through the upcoming August recess. He has indicated in recent weeks that the plan will be formally rolled out as three separate bills that will be marked up in the Ways and Means Committee and voted on by the full House in September. Tax News & Views Page 1 of 12 Copyright 2018 Deloitte Development LLC

2 Permanent relief for individuals and passthroughs The outline calls for locking in the individual and small business tax cuts from last year, which presumably includes permanent extensions of, among other things, the lower income tax rates and increased standard deduction, increased exemption amounts for the estate tax, and the 20 percent deduction for certain passthrough income. Retirement and family savings According to the outline, the Tax Cuts 2.0 plan will include provisions that would help local businesses provide retirement plans to their workers and help workers participate in those plans so their retirement years are more secure. Although the outline does not identify specific proposals, Brady has hinted in recent weeks that this component of the plan could draw on the bipartisan Retirement Enhancement and Savings Act (RESA), which was introduced in the Senate (S. 2526) earlier this year by Finance Committee Chairman Orrin Hatch, R-Utah, and ranking Democrat Ron Wyden of Oregon and is based on similar legislation that the Finance panel unanimously approved in (For prior coverage, see Tax News & Views, Vol. 17, No. 30, Sep. 23, 2016.) A companion version of RESA (H.R. 5282) was introduced in the House by Ways and Means Committee Republican Mike Kelly of Pennsylvania. URL: Brady also has stated that the plan may include some retirement account provisions that were part of the tax cut bill that cleared the Ways and Means Committee last fall but were not included in the enacted legislation. Other tax-preferred savings plans: The outline states once again without elaboration that the Tax Cut 2.0 plan also would encourage individuals to save for other major life expenses by: Creating a tax-preferred Universal Savings Account to offer a fully flexible savings tool for families ; Expanding the rules around tax-preferred section 529 accounts so families can use their education savings to pay for apprenticeship fees to learn a trade, cover the cost of home schooling, and help pay off student debt ; and Permitting families to make penalty-free withdrawals from their retirement plans to cover expenses associated with the birth or adoption of a new child and allowing them to replenish those accounts in the future. Business innovation Brady has stated in recent weeks that the Tax Cuts 2.0 plan would include provisions to promote more start-up businesses, although he did not indicate just what this might entail. The outline hints at an expansion of current-law depreciation rules it states the plan will help brand-new businesses write off more of their initial start-up costs but otherwise is short on details. It also broadly asserts that the plan will remove barriers to growth. What didn t get mentioned As members of the tax community parsed the few details that were included in the outline, they also attempted to determine the potential significance of several issues that were left unaddressed. Capital gains indexing: The outline is silent on whether the Tax Cuts 2.0 plan will include a provision to index capital gains income to inflation. Ways and Means Committee Republican Devin Nunes of California introduced a proposal for capital gains indexing on July 19. (See separate coverage in this issue for details.) URL: In recent weeks, Brady has seemed open to including such a provision in the next round of tax cuts, although he stopped short of endorsing the idea outright. Congressional tax staffers have indicated that the proposal wasn t included in the outline because Republican Ways and Means members are not all on board, and in comments to reporters July 24, Brady appeared to suggest that capital gains relief may have to wait for a subsequent tax package. There s a 3.0 and a 4.0 and we hope a 5.0. The focus on this one has really been on the permanence, on the savings issue, and the innovation, he said. Tax News & Views Page 2 of 12 Copyright 2018 Deloitte Development LLC

3 SALT cap: The outline does not indicate whether Republicans also hope to permanently extend a provision in the 2017 law that caps the deduction for state and local taxes (SALT) at $10,000. The cap, which was included in last year s legislation as an alternative to an outright repeal of the SALT deduction, is currently scheduled to expire after It has been a target of criticism from congressional Democrats and from several GOP lawmakers who represent constituents living in high-tax jurisdictions. Brady deflected criticisms about the deduction cap during a July 26 interview on Fox Business, arguing that states are getting a windfall as the new law sparks growth in wages and employee bonuses that generates additional tax revenue at the local level. The question is, are they going to pocket it or pass it on to [their residents], he said. But he was more direct in subsequent comments to reporters, remarking that under prior law, half of the SALT deductions above [$10,000 went] to homes of $1 million or households of $1 million or more. So we think out of fairness, that cap ought to remain. Revenue offsets: The outline does not identify any significant revenue provisions that would offset the cost of the proposed tax relief. The nonpartisan Congressional Budget Office recently estimated making permanent the individual and passthrough tax cuts enacted last year the first prong of the Tax Cut 2.0 plan would reduce federal receipts by $650 billion over 10 years. The cost of the savings and business innovation components of the plan will only become clear as details around those proposals are finalized. As they moved last year s tax bill through Congress, House Republicans argued that revenue offsets were unnecessary because tax cuts would largely pay for themselves as they incentivize business investment and job growth and drive higher economic growth over time. In comments to reporters on July 23, Brady appeared to suggest that there will not be a major offset title in any of the components of Tax Cuts 2.0, although there may be some stray provisions that could be scored as revenue raisers. In the discussions we ve had, there are some measures that raise revenues because of the policies, but they re not there specifically because of the offsets. That s really because the policies happen to create some savings, he said. Brady told reporters July 26 that any revenue provisions that may appear in the finalized plan will be a very modest ticket. Technical corrections: Brady recently commented that he would also sketch out a path forward this week on the technical corrections to last year s tax legislation; but the outline is silent on these and Brady s public remarks since the outline was released have shed no new light on the issue. Staff say that will be a separate legislative effort, and, based on recent comments from House Speaker Paul Ryan, R-Wis., it appears that a technical corrections package most likely will have to wait until a lame duck session after the November midterm elections. (For prior coverage, see Tax News & Views, Vol. 19, No. 22, July 13, 2018.) URL: Reaction from the GOP rank-and-file and allies Republicans who do not sit on the House taxwriting committee but participated in the first listening session Brady hosted this week and spoke to reporters afterwards were generally positive about the outline although they also had ideas for improvements. Rep. Andy Biggs of Arizona told Roll Call he would like the tax package to include some improvements to the passthrough provisions, as well as the indexing of capital gains. And Rep. Bradley Byrne of Alabama dubbed Brady s proposal pretty good but advocated for the repeal of a new tax levied on private college endowments in last year s bill. Outside groups broadly supportive of the Republican agenda also chimed in with suggestions such as a full repeal of the estate and gift taxes. Tax News & Views Page 3 of 12 Copyright 2018 Deloitte Development LLC

4 House Democratic response The ranking Democrat on the Ways and Means Committee, Rep. Richard Neal of Massachusetts, said he would reserve judgement on the retirement and business innovation proposals until he sees the details and legislative language, but he criticized the goal of permanent tax cuts as fiscally irresponsible. It s going to be brought to floor more as a statement about [Republicans ] prospects in November than it is about sound policy, he said. In a statement, House Democratic Leader Nancy Pelosi of California dubbed the proposal the second wave of [the] GOP Tax Scam for the rich and said Republicans are seeking to explode the deficit in order to force cuts to entitlement programs. And the Senate? The eventual Tax Cuts 2.0 package can clear the House on the strength of Republican votes alone, but it faces a far more difficult path forward in the Senate, where Republicans control only 51 seats and 60 votes will be required to clear procedural hurdles. The lack of revenue offsets appears to be a deal-breaker for at least two Senate Republicans Bob Corker of Tennessee and Jeff Flake of Arizona who have said they will not support tax cuts that further add to the federal deficit. (Both are retiring at the end of this congressional session.) But even if Corker and Flake were supportive, Republicans still would need at least 9 Democratic votes to pass legislation and few if any of the 49 Senate Democrats are expected to support making last year s individual tax cuts permanent the centerpiece of the Ways and Means proposal. The retirement savings component of the House plan is seen as having the best chance of passage in the upper chamber especially if the final product resembles the bipartisan Retirement Enhancement and Savings Act. (Senate Finance Committee ranking Democrat Ron Wyden of Oregon has indicated that the RESA proposal could clear that chamber as a stand-alone bill.) But even that may be a heavy lift before November s elections. Ways and Means Chairman Brady has expressed the hope in recent weeks that packaging the next round of tax cuts as a series of individual bills rather than one comprehensive piece of legislation will improve the odds that at least some of the GOP proposals can make it through the Senate and reach the president s desk. Obviously [Senate Majority Leader Mitch] McConnell is interested in what can achieve 60 votes, Brady told reporters July 24, so I think it makes sense to send them a package that allows them to identify which ones can move. Michael DeHoff and Storme Sixeas Tax Policy Group Deloitte Tax LLP House votes to repeal medical device tax, relax HSA rules The House of Representatives this week approved three Republican-sponsored bills that would repeal the medical device excise tax enacted under the Patient Protection and Affordable Care Act of 2010 (PPACA), suspend the imposition of the PPACA s annual fee on health insurance providers, and make a variety of changes to loosen restrictions on tax-preferred health savings accounts (HSAs). Medical device excise tax The House voted on July 24 to approve legislation (H.R. 184), sponsored by Ways and Means Committee member Erik Paulsen, R-Minn., that would repeal the PPACA s 2.3 percent excise tax on the sale of medical devices. The bill had bipartisan support, with 57 Democrats joining 226 Republicans in the aye column. (Only 1 Republican broke ranks to vote against passage.) Tax News & Views Page 4 of 12 Copyright 2018 Deloitte Development LLC

5 There have been bipartisan efforts to repeal the tax since it came into force in The levy was suspended effective for calendar years 2018 and 2019 as part of a short-term continuing resolution approved in the House and Senate on January 22 of this year. It was suspended for 2016 and 2017 under the Protecting Americans from Tax Hikes (PATH)/Consolidated Appropriations Act, enacted in December Health insurer fee, premium tax credit The House also approved legislation (H.R. 6311) by a vote of on July 25 that would suspend the PPACA s annual fee on health insurance providers for calendar years 2020 and The fee is in effect for calendar year 2018 but was suspended for 2019 under the January 22 short-term government funding bill. (The PATH Act suspended this fee for calendar year 2017.) Another provision in H.R would allow the PPACA s premium tax credit to be used for qualified plans offered outside of the law s exchanges and Healthcare.gov. It also would expand access to the lowest-premium plans available ( catastrophic plans) for all individuals purchasing coverage in the individual market and allow the premium tax credit to be used to offset the cost of those plans. The provisions would be effective for taxable years beginning after December 31, Twelve Democrats crossed the aisle to vote in favor of the measure. HSA provisions H.R. 6311, along with a separate bill (H.R. 6199, which won support from 46 Democrats and passed by a vote of on July 25) includes provisions that would make health savings accounts available to a broader range of taxpayers and make the accounts more flexible by, among other things, bumping up contribution limits and expanding the list of products and services that can be paid for with HSA funds. (HSAs are tax-preferred savings accounts which, when used in conjunction with a high-deductible health insurance plan, allow individuals to pay for qualifying out-of-pocket health care expenses with tax-free dollars.) H.R and H.R incorporate HSA provisions in several smaller bills some with bipartisan co-sponsors that cleared the Ways and Means Committee during a mark-up earlier this month. H.R. 6311: As passed in the House, H.R would: Increase the contribution limits for HSAs to the combined amount of the deductible and out-of-pocket limitation for the related insurance plan; Permit spouses to make catch-up contributions into the same account; Create a grace period for medical expenses incurred after the purchase of an HSA-qualified insurance plan but before the establishment of an HSA; Allow individuals age 65 and older who are still employed and are enrolled only in Medicare Part A to contribute to an HSA; and Allow plans categorized as catastrophic and bronze in the individual and small group markets to qualify for HSA contributions. The bill also includes a provision that would allow unspent balances in health flexible spending arrangements (FSAs) to be carried forward each year, with the FSA contribution limit for a given plan year reduced to the extent a carryforward from the immediately preceding year exceeds $500. H.R. 6399: Provisions in this bill would: Allow HSA-eligible plans to cover certain preventive and chronic disease management services on a first-dollar basis, subject to a threshold; Clarify that certain employment-related services (such as on-site clinics) are not treated as disqualifying coverage for purposes of HSAs; Allow an eligible individual to make HSA contributions if a spouse has a flexible spending account, provided that the FSA does not also reimburse for expenses of the spouse with the HSA; Allow FSA and Health Reimbursement Account terminations or conversions to fund HSAs; Tax News & Views Page 5 of 12 Copyright 2018 Deloitte Development LLC

6 Provide that HSA-eligible individuals who participate in a direct primary care (DPC) arrangement will not lose their HSA eligibility merely because of their participation in a DPC; Allow DPC provider fees to be paid for out of HSAs; Add over-the-counter menstrual care products to the list of HSA-qualified medical expenses; and Add certain sports and fitness expenses to the list of HSA-qualified medical expenses, subject to an annual cap. The HSA provisions in the two bills generally would take effect after December 31, Senate prospects uncertain The three House-approved bills now head to the Senate, although it is unclear when or if Republican leaders in that chamber intend to take them up. All three bills enjoyed a measure of bipartisan support in the House, but many Senate Democrats may object to the fact that they are not offset a concern voiced by many of their House counterparts and may be reluctant to provide Republicans the supermajority they would need to overcome procedural hurdles and secure passage. (Republicans control only 51 seats in the Senate, and 60 votes would be required to break a filibuster.) According to estimates from the Joint Committee on Taxation (JCT) staff, H.R would reduce federal receipts by $48.9 billion between 2019 and 2028, and H.R would cost the fisc nearly $20 billion over the same period. The JCT has not yet released a revenue estimate for H.R. 184 (repeal of the medical device excise tax); however, a revenue score the JCT released in 2017 for House legislation that would have dismantled the PPACA indicated that the provision would reduce federal revenues by $19.6 billion from URL: URL: URL: No action on employer mandate, Cadilliac tax The House did not act on legislation (H.R. 4616) approved by the Ways and Means Committee earlier this month that would suspend the PPACA s employer mandate retroactively for any month beginning after December 31, 2014, and before January 1, 2019, and delay implementation of the PPACA s Cadillac tax on certain high-cost employerprovided health plans until taxable years beginning after December 31, Ways and Means Chairman Kevin Brady, R-Texas, told reporters July 26 that the proposal is still in play for the fall. Other House developments In other developments, the House passed targeted tax bills that would: Add a religious-conscience exemption from the PPACA s individual health care mandate (H.R. 1201); Allow individuals eligible for Indian Health Service assistance to qualify for HSAs (H.R. 1476); Modify the tax exemption requirements for irrigation cooperatives (H.R. 519); and Prohibit the IRS from rehiring former employees who were dismissed for professional misconduct (H.R. 3500). These measures were approved July 24 under an expedited procedure known as suspension of the rules, which requires a two-thirds vote for passage. Also this week, House Transportation Committee Chairman Bill Shuster, R-Pa., released a discussion draft of an infrastructure proposal that, among other things, calls for increasing the federal gasoline tax by 15 cents per gallon and repealing the levy after 10 years in favor of a vehicle miles traveled fee. The plan was meant to spark discussion about infrastructure issues and is not currently seen as being on a fast track to passage. URL: Michael DeHoff Tax Policy Group Deloitte Tax LLP Tax News & Views Page 6 of 12 Copyright 2018 Deloitte Development LLC

7 Finance Dems vent over donor disclosure changes at Treasury nomination hearing Senate Finance Committee Democrats used a July 26 hearing to consider the nominations of Justin Muzinich to serve as Treasury deputy secretary and Michael Desmond to be IRS chief counsel and Treasury assistant general counsel as a platform to air a number of policy grievances most notably about recent IRS guidance that the committee s minority leader referred to as a dark money policy. Donor disclosure and other issues The new guidance (Rev. Proc ), which was issued July 17, generally provides that tax-exempt organizations other than section 501(c)(3) groups are no longer required to disclose names and addresses of donors on their Forms 990 or Forms 990-EZ. Democratic members of the Finance Committee argued this change will make it easier for anonymous foreign donors to funnel money into nonprofit entities. URL: If your new pro-corruption, pro-secrecy policy gave oligarchs in Moscow reason to throw back celebratory vodkas, you re doing it wrong, ranking Democrat Ron Wyden of Oregon said during his opening remarks at the hearing. Finance Democrats initially demonstrated their opposition to the new donor disclosure guidance last week when they skipped a scheduled vote to advance President Trump s nomination of Charles Reittig to serve as IRS commissioner. (The vote was held several hours later, and Rettig s nomination cleared the panel with no Democratic support. For prior coverage, see Tax News & Views, Vol. 19, No. 23, July 20, 2018.) URL: During the July 26 hearing, Finance Committee Republican Charles Grassley of Iowa characterized Democrats reaction to the IRS s move as making hay and noted that the administrative change was proposed by Treasury officials during the Obama administration. In his opening statement at the hearing, Finance Committee Chairman Orrin Hatch, R-Utah, characterized the new guidance as a simple change to improve IRS efficiencies and protect taxpayer data, adding that on the heels of IRS taxpayer-information abuses during the Obama administration, attention to taxpayer protection is a must. Wyden and his fellow committee Democrats also probed the nominees on topics including halting abuse by shell companies, President Trump s undisclosed tax returns, Treasury s response to legislative efforts in numerous states to circumvent the federal cap on the deduction for state and local taxes that was enacted in last year s tax cut legislation (P.L ), the recently revised tax form 1040, and the Trump administration s newly enacted tariffs. The nominees weigh in As a current official who has been serving as counselor to Treasury Secretary Steven Mnuchin, Muzinich bore the brunt of the questioning and the criticism of the administration. In response to a question from Democratic Sen. Michael Bennet of Colorado, Muzinich said he believes that the 2017 tax cuts will pay for themselves and reduce the federal deficit, as other Republicans in Congress and the administration have stated. This prompted Bennet to ask that Muzinich return to testify before the committee next year if that turns out not to be the case. Muzinich also told the committee that, in his current role, he has been focused on tax reform and implementation rather than administration and was not a decision-maker on the new donor disclosure guidance, which he characterized as a tool to make tax administration more efficient. But his comments left Wyden dissatisfied. Tax News & Views Page 7 of 12 Copyright 2018 Deloitte Development LLC

8 The committee has faced unprecedented levels of stonewalling from the administration on letters and policy issues that I never expected I would see, said Wyden during the hearing. We would get similar answers from the Treasury if we posed our questions to the statue of Alexander Hamilton outside the department s headquarters. In the role of IRS chief counsel, Desmond a sole practitioner in California focused on tax controversy issues who previously served as a tax legislative counsel during the George W. Bush Administration would advise the IRS commissioner on the interpretation, administration, and enforcement of tax laws. As such, members of the Finance Committee primarily focused during the hearing on the role he will play in implementing the 2017 tax bill. Timing for Rettig final confirmation vote unclear The ongoing partisan split on the Finance panel over the IRS disclosure rules appears to have delayed a vote by the full Senate to confirm Charles Rettig as IRS commissioner. Wyden is calling for Rettig to come back before the Finance Committee to discuss the new guidance, and without Democrats agreement to waive lengthy floor debate, Senate Republican leaders determined they did not have enough time to hold a final vote this week. Staff for Majority Leader Mitch McConnell, R-Ky., on July 26 circulated a list of specific items that that will be considered the week of July 30, and a vote on Reittig was not included, although it could be added later in the week or considered in August. (The Senate will recess the week of August 6 but will return on August 13 and could be in session the remainder of the month.) Portman, Cardin release IRS reform proposal In other Finance Committee developments, taxwriters Rob Portman, R-Ohio, and Ben Cardin, D-Md., unveiled an IRS reform proposal on July 26 aimed at revitalizing the agency s organizational structure, increasing taxpayer protections and modernizing enforcement procedures, improving small business and retirement plan tax administration, improving service for low-income taxpayers, overhauling the appeals process, and strengthening the Service s information technology infrastructure. Among its more notable provisions, the legislation would: Reinstate IRS authority to regulate paid tax return preparers; Limit access of non-irs employees to returns or return information, including a prohibition against questioning witnesses under oath; Prevent IRS compliance personnel from participating in appeals proceedings without the direct consent of the taxpayer; Create a safe harbor for employee-only tip audits if employers comply with certain employee education and IRS employee audit programs; Streamline procedures for making an S corporation election; Allow retirement plan administrators to self-correct all inadvertent plan violations without additional submissions to the IRS (except as otherwise provided in regulation); Reauthorize streamlined critical pay authority for recruitment and retention of information technology employees at the IRS through September 30, 2023; Reform the IRS Oversight Board by, among other things, increasing its involvement in the IRS budget request process and requiring board approval of compensation and bonuses for IRS senior executives; and Require the IRS to develop a comprehensive employee training strategy with a focus on taxpayer rights, customer service, and information technology advancement. Portman noted in a July 26 news release that the proposal is intended to complement IRS reform legislation recently introduced by Finance Committee Hatch and ranking Democrat Wyden. (For prior coverage, see Tax News & Views, Vol. 19, No. 23, July 20, 2018.) URL: It is unclear when the Finance Committee will take up either proposal. Tax News & Views Page 8 of 12 Copyright 2018 Deloitte Development LLC

9 The House of Representatives approved several IRS reform proposals of its own in April. (For prior coverage, see Tax News & Views, Vol. 19, No. 13, Apr. 20, 2018.) URL: Storme Sixeas and Michael DeHoff Tax Policy Group Deloitte Tax LLP Nunes releases bill to index capital gains to inflation As a follow-up to last year s tax reform legislation (P.L ), House Ways and Means Committee member Devin Nunes, R-Calif., released a proposal July 19 that would permit capital assets to be indexed to inflation for purposes of calculating gain or loss. The Capital Gains Inflation Relief Act (H.R. 6444), would alleviate some of the extra taxation associated with built-in gains related to increased economic output rather than the underlying value of the asset. Ordinary income tax levels are already indexed to inflation the adjustments are incorporated into the updated rate tables the IRS releases each year so the proposal seeks to improve parity between the two classes of income. URL: In a press release, Nunes called the proposal a common-sense reform that will remove an unjust tax, contribute to economic growth, and help both large and small investors keep more of their own money. How it would work The proposal would create a new Internal Revenue Code section 1023 and redesignate the current section 1023 as section The new section would create a defined term, indexed basis, that would be used to calculate taxable gains on assets that meet certain criteria. Eligible assets: In general, the asset would need to be held for three years, two years longer than the current threshold for long-term capital gains. Three broad categories of assets that would be eligible for inflation indexing include: Stock of a domestic C corporation; Stock of a regularly traded foreign corporation (with certain restrictions); and Tangible property used in a trade or business. Regulated investment companies (RICs) and real estate investment trusts (REITs) would be eligible for the relief, as would partnerships and S corporations, although all of these entities would be subject to additional rules. Certain types of assets would not be eligible, including short sales or transactions in which the risk of loss is diminished. Calculating the inflation adjustment: The indexed basis would be calculated by increasing the adjusted basis by a factor approximating inflation, namely the gross domestic product deflator (GDPD). The seller would compare the GDPD from the quarter in which the asset was sold with the GDPD for the quarter ending before the asset was acquired. This differential percentage would then be multiplied by the adjusted basis to create the indexed basis. Next steps unclear Prospects for Ways and Means Committee action on the proposal are currently unclear. Committee Chairman Kevin Brady, R-Texas, had hinted in recent weeks that he might be open to a capital gain indexing provision as part of the Tax Cuts 2.0 package that is currently being developed by Ways and Means Republicans and is expected to receive a vote on the House floor in September; but capital gains taxation was not specifically addressed in the preliminary outline for the broader tax cut plan that Brady made public on July 24. (See separate coverage in this issue for details.) Tax News & Views Page 9 of 12 Copyright 2018 Deloitte Development LLC

10 The Tax Cuts 2.0 package is expected to be refined over the next several weeks as Ways and Means Committee Republicans hold a series of listening sessions with rank-and-file House GOP members. Jacob Puhl Tax Policy Group Deloitte Tax LLP Little consensus on legislative next steps post-wayfair Lawmakers and witnesses at a July 24 House Judiciary Committee hearing on how the Supreme Court s recent holding in South Dakota v. Wayfair, Inc., et. al., would affect consumers and small businesses disagreed over whether the case was correctly decided and on what action if any Congress should take in response. In a 5-4 decision issued June 21, the Court s majority overruled the sales/use tax nexus standard of physical presence established in National Bellas Hess and later upheld in Quill as it applied to South Dakota s sales/transaction-based sales/use tax nexus statutes affecting remote seller transactions. Congress needs to act Committee Chairman Bob Goodlatte, R-Va., argued that the Wayfair decision was a step in the wrong direction and that it upended a stable precedent and will lead to states overreaching in the collection of taxes. He contended that the physical presence test protected businesses of all sizes by providing a bright-line rule for when a state could force a business to collect and remit sales taxes. He was joined by other committee members and witnesses in arguing the Court s decision will increase complexity for remote sellers, who will have to navigate a patchwork of over 12,000 different taxing jurisdictions. Several witnesses, including Grover Norquist of Americans for Tax Reform and Bartlett Cleland of the American Legislative Exchange Council, decried the decision as a loss for federalism. Goodlatte joined them in calling for Congress to address the issue legislatively or at least impose a moratorium on collection while states and stakeholders decide how best to proceed. Or maybe not Others on the committee and the witness panel argued that no legislative action was necessary. Rep. David Cicilline, D-R.I., claimed that Wayfair would equalize the tax treatment of on-line retailers and brick-and-mortar stores, who had been struggling to compete with their nontaxed counterparts. Ranking member Jerry Nadler, D-N.Y., argued it would be inappropriate for Congress to step in and rule on the tax policies of various states. At least one witness argued that action was not currently necessary but could be in the future. Joseph Crosby of MultiState Associates Incorporated cautioned that a moratorium across all 50 states would affect each one differently, as some have had on-line sales tax collection rules in place for some time and would thus lose established revenue streams. Curt Bramble, who spoke on behalf of the National Conference of State Legislatures (NCSL) downplayed concerns over hardships entailed by remote sellers in dealing with the patchwork of state and local tax jurisdictions, noting that municipalities do not separately collect and audit for sales taxes. Retroactive tax collection One concern repeatedly raised at the hearing was the notion that states would attempt to collect sales and use taxes from on-line transactions retroactively. Tax News & Views Page 10 of 12 Copyright 2018 Deloitte Development LLC

11 Norquist felt very strongly that many states that have enacted laws similar to the one at issue in Wayfair have already sought to collect taxes retroactively and that Wayfair will make this effort much easier. Andrew Moylan of the National Taxpayers Union Foundation (NTUF) likewise cautioned that several states do not have rules against retroactive collection, which could lead to a scramble to get revenue post-wayfair. But other witnesses noted that some states specifically prohibit retroactive collection. Slippery slope Several committee members, including Chairman Goodlatte, cited a slippery slope argument that allowing states to increase their sales tax authority would embolden them to extend their reach on personal and corporate income taxes as well. Norquist insisted that sales taxes represent a relatively small share of state revenues and that states ultimately are seeking ways to collect larger amounts of income taxes, especially at the corporate level. And the slippery slope wouldn t necessarily end with the states, as noted by Rep. Mike Johnson, R-La. In response to his question about foreign tax authorities interpretation of the Wayfair decision, Norquist warned that the EU would use this precedent to tax revenues of US companies operating abroad even if they lack a permanent establishment. Taxpayer challenges The NCSL s Bramble told committee members that the Commerce Clause still exists to protect businesses from undue burdens and that anyone could challenge the constitutionality of a tax. But Andrew Pincus of Mayer Brown argued that tax must be paid before a constitutional challenge, which could be burdensome to many resource-constrained small businesses. Pincus later suggested a way to overcome this would be for Congress to enact a law allowing a business that feels it has been unfairly taxed to challenge that tax without first paying. Unanswered questions Another oft-cited issue was the questions not answered by Wayfair. While the decision states that a lack of physical presence in a state is not enough to create an undue burden under the Commerce Clause, the Court did not discuss what would create an undue burden. One question asked by several members was whether the threshold used by South Dakota for small businesses ($100,000 in sales or 200 transactions into the state) should apply in every state or whether larger states such as California and New York should impose higher thresholds. The NTUF s Moylan mentioned that some states require sellers to purchase a sales tax bond to insure prompt collection of sales taxes and wondered if all sellers who avail themselves of a state would need to buy a bond. Lawmakers and witnesses also debated issues around the availability of software to help businesses navigate the complexity of different jurisdictions tax rules. Some witnesses argued that the software would cost businesses millions of dollars, while one Lary Sinewitz, who testified on behalf of the National Retail Federation said the software would cost much less. What the states are doing There was a fair amount of testimony concerning what could occur in the states going forward. Bramble, who is a former president of the NCSL and a current member of the Utah State Senate, said Utah had enacted a remote sales tax collection law since Wayfair that is in line with the threshold approved by the Court. And Moylan warned that as certain tax filing deadlines approach, more states would rapidly pass laws to begin collecting as well. Norquist said that some states, like New Hampshire, are taking precautionary measures and considering legislation to protect their citizens from taxation in other states. (The New Hampshire bill failed in a special legislative session held on July 25, when that state s House amended and ultimately rejected the unanimously-passed Senate proposal, despite support from the leadership in both parties as well as Republican Gov. Chris Sununu.) Tax News & Views Page 11 of 12 Copyright 2018 Deloitte Development LLC

12 Multistate Tax Alerts available Recent tax alerts on Wayfair from Deloitte Tax LLP s Multistate Tax Group address the potential implications for remote sellers overall, potential nexus ramifications for income and other taxes, state tax implications for non-us companies with US customers, and potential financial reporting implications if states with laws similar to the South Dakota statute were to assert those laws retroactively. URL: URL: URL: URL: Jacob Puhl Tax Policy Group Deloitte Tax LLP About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. In the United States, Deloitte refers to one or more of the US member firms of DTTL, their related entities that operate using the Deloitte name in the United States and their respective affiliates. Certain services may not be available to attest clients under the rules and regulations of public accounting. Please see to learn more about our global network of member firms. Copyright 2018 Deloitte Development LLC. 36 USC Tax News & Views Page 12 of 12 Copyright 2018 Deloitte Development LLC