The No Regulation Without Representation Act of 2017 (NRWRA) is scheduled for a hearing before the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law on Tuesday, July 25 at 10:00 am EDT in 2141 Rayburn House Office Building. The bill was introduced by Congressman Jim Sensenbrenner (R-WI) last month with House Judiciary Chairman Bob Goodlatte (R-VA) as one of seven original co-sponsors. As described in more detail below, the bill would codify the Bellas Hess “physical presence” requirement upheld by the US Supreme Court in Quill and make that requirement applicable to sales, use and other similar transactional taxes, notice and reporting requirements, net income taxes and other business activity taxes. Extending the concept to an area far beyond state taxation, the bill would also require the same physical presence for a state or locality to regulate the out-of-state production, manufacturing or post-sale disposal of any good or service sold to locations within its jurisdictional borders.
In the last Congress, the Business Activity Tax Simplification Act of 2015 (BATSA) would have codified a physical presence requirement in the context of business activity taxes (e.g., net income and gross receipts taxes). However, the scope of NRWRA’s limitations on interstate regulation and tax differs from the standard set forth in BATSA. Specifically, under BATSA, assigning an employee to a state constitutes physical presence, whereas under NRWRA a company does not have physical presence until it employs more than two employees in the state (or a single employee if he or she is in the state and provides design, installation or repair services or “substantially assists” in establishing or maintaining a market). Under NRWRA, activities related to the potential or actual purchase of goods or services in the state or locality are not a physical presence if the final decision to purchase is made outside of the jurisdiction.
Not only is the scope of NRWRA’s limitation broader with respect to the definition of physical presence, but also on the activities that are limited. BATSA only addresses business activity taxes. NRWRA addresses business activity taxes, sales and use taxes, plus regulation of any activities in interstate commerce. Therefore, NRWRA is not BATSA plus Quill codification—it is those things plus significant limitations on any non-tax regulation of commercial activity.
A. Scope of Minimum Jurisdictional Standards
Under its Commerce Clause authority granted by the US Constitution, Congress has the ability to regulate interstate commerce. NRWRA would affirmatively do so by providing that “a [s]tate [or locality] may tax or regulate a person’s activity in interstate commerce only when such person is physically present in the [s]tate [or locality] during the period in which the tax or regulation is imposed.” Sec. 2(a). “Tax” is broadly defined to mean: (1) imposing a collection or reporting obligation for or assessing sales, use and other transactional taxes; (2) treating a person as doing business in the jurisdiction for purposes of such a tax; or (3) imposing a net income or other business activity tax. See Sec. 4(a)(10). “Regulate” means to impose a standard or requirement on the production, manufacture, or post-sale disposal of any good or service (tangible or intangible) sold or offered for sale in interstate commerce as a condition of sale in a jurisdiction. See Sec. 4(a)(6). The term is limited to situations when: (1) the production or manufacture occurs outside its borders; (2) the requirement is in addition to any applicable requirements under federal law or the laws of the state and localities in which the production occurs; (3) it is not expressly permitted by federal law; and (4) the requirement is enforced by the executive branch of the state or locality or its agents or contractors. Id.
B. “Physical Presence” Defined
For purposes of the NRWRA jurisdictional standard applicable to the ability of a state or locality to “tax or regulate,” a person has a “physical presence” in a state or locality only if their in-state business activities during the calendar year include one or more of the following:
1. Maintaining its commercial or legal domicile in the state or locality;
2. Owning or leasing real or tangible personal property (excluding software) in the state or locality;
3. Has one or more employees, agents or independent contractors in the state or locality providing design, installation or repair services on behalf of a remote seller;
4. Has one or more employees, exclusive agents or exclusive independent contractors in the jurisdiction who engage in activities that substantially assist the person to establish or maintain a market in the state or locality; or
5. Regularly employs three or more employees in the state or locality.
The bill also provides that “physical presence” does not include the following:
1. Click-through referral agreements with in-state persons who receive commissions for referring customers to the seller;
2. Presence for less than 15 days in a taxable year;
3. Product delivery provided by a carrier or other service provider;
4. Internet advertising services not exclusively directed towards, or exclusively soliciting customers in the jurisdiction;
5. Ownership by a person outside of the state of an interest in a limited liability corporation (LLC) or similar entity organized or with a physical presence in the state or locality;
6. The furnishing of information to people in the jurisdiction or the gathering of information from people in the jurisdiction, provided the information is used or disseminated from outside of the state or locality; and
7. Activities related to the person’s potential or actual purchase of goods or services in the state or locality if the final decision to purchase is made outside of the jurisdiction.
C. Protection for Non-Sellers
The bill also extends the physical presence jurisdictional standard to non-sellers for transaction tax purposes. The term “seller” is not explicitly defined, but expressly excludes a marketplace provider (except with respect to the sale through the marketplace of products owned by the marketplace provider), referrers, unrelated carriers, credit card issuers, billing processors and other financial intermediaries. See Sec. 4(a)(7). A “marketplace provider” includes any person, other than a seller, who facilitates a sale. See Sec. 4(a)(1). A sale is facilitated by: (1) listing or advertising products for sale in any forum, including a catalog or website; and (2) either directly or indirectly collects gross receipts from the customer and transmits those receipts to the marketplace seller, whether or not such person deducts fees or other amounts. Id. The term “referrer” is also specifically defined in NRWRA. See Sec. 4(a)(5).
For non-sellers, the bill provides that “[a] [state or locality] may not impose or assess a sales, use or similar tax on a person or impose an obligation to collect or report any information with respect thereto, unless such person is either a purchaser or a seller having a physical presence in the [jurisdiction].” Sec. 2(c).
D. Dispute Resolution
NRWRA gives federal district courts original jurisdiction over civil actions to enforce its provisions and expressly gives the federal district courts authority to issue declaratory judgments and injunctive relief. See Sec. 3.
E. Effective Date
As introduced, the provisions of NRWRA would apply “to calendar quarters beginning on or after January 1, 2018.” Sec. 4(b).
If passed, NRWRA would have an enormous impact not just on state and local tax, but on all regulation of business activities by these jurisdictions. It would do so by codifying the Bellas Hess physical presence rule upheld by the US Supreme Court in Quill and would preempt many of the recent attempts by state and local governments to circumvent or disregard this standard, such as click-through, notice and reporting requirements, marketplace provider nexus, and economic nexus. NRWRA would also prohibit the ability of a state or locality to regulate sales of products produced or manufactured in another jurisdiction. Although this bill significantly addresses state taxation of out-of-state companies, it goes well beyond that and would have an exponential impact on non-tax regulation of interstate commerce.