Is Washington DC About to Pass an Internet Remote-Seller Tax?

The District of Columbia may be the next locale to adopt a remote-seller nexus tax law – if they can get it past Congress.

On June 14th, the D.C. Council adopted it’s 2012 fiscal year budget, otherwise known as D.C. Bill 19-203. In addition to several tax increases, the Council also wants to adopt its version of a “Main Street Tax Fairness Act”, which would create a nexus presumption for remote sellers, who sell goods or taxable services over the Internet, to D.C. residents.

The bill is short on specifics, including a specific sales threshold amount, or what constitutes an exempt vendor.

In addition to a remote seller nexus requirement, the bill also makes other changes, including:

  • A new requirement for combined unitary reporting for the D.C. corporation franchise tax,
  • A change to the current corporation franchise tax apportionment formula of equally-weighted property, payroll, and sales factors to a formula utilizing a double-weighted sales factor, and
  • an increase inthe minimum corporation franchise and unincorporated business tax

But the Bill needs several layers of approval before it can become effective. First, the Mayor must sign off on it, or allow it to sit, unsigned, for a specified period of time, after which it is considered to be approved. Assuming this happens, the Bill moves on for approval by Congress. In order for Congress to approve the Bill, they must also agree to pass a new Act giving the District of Columbia authority to impose the remote seller Internet tax, as there is no such law on the books now.

However, the Bill, as drafted, will likely face a challenge, in that it directly contradicts existing federal laws on interstate sales tax. Rather than use the affiliate nexus definition that we’ve seen in New York, Illinois and other states, the District of Columbia has just made a blanket statement that if you sell taxable goods or services over the Internet to District residents, you have a sales tax obligation. Without some sort of physical connection, it’s going to be difficult to get this through Congress. On the other hand, if Congress does allow the Bill to pass and become law, that could create even more marketplace confusion, as other states try to do the same thing.

With the Bill, the District of Columbia joins Connecticut and 12 other states that have introduced Internet sales tax legislation this year. Arkansas, Connecticut, Illinois and South Dakota both introduced and passed legislation creating an affiliate nexus tax earlier this year. These 4 states join New York, North Carolina, Rhode Island and Colorado in passing legislation. However, litigation challenging the constitutionality of these laws is presently underway in both New York and Illinois.