Beyond Wayfair: The New Landscape of Economic Presence
Get used to it. The way we need to think about the state of affairs for remote sellers of tangible and software products for a variety of taxes needs to change in the wake of the US Supreme Court’s June 2018 decision in Wayfair v. South Dakota.
The 5-4 decision overturned a 1992 USSC decision (Quill) related to sales tax. While the Supreme Court remanded the Wayfair case to the South Dakota courts for re-evaluation, most experts expect that the state will ultimately prevail against all challenges.
As such, moving forward, it will no longer be required for a company to have physical presence in a state for that state to impose a collection responsibility regarding sales delivered into their jurisdiction.
Although there are standards a state has to meet so that they can impose the requirement to collect tax, some states have already responded to the Wayfair decision by enacting new laws and others are coming on board weekly.
One of the messages sent by the USSC via their decision is that there still needs to be some kind of minimum threshold a taxpayer must exceed in order to be required to collect sales tax.
The USSC in effect signaled that the South Dakota standard of $100,000 of sales or 200 transactions appears appropriate. This is important, because the Commerce Clause requires that there not be undue restriction on interstate commerce.
Another key aspect to the USSC receptivity to the South Dakota approach involves retroactivity. South Dakota is not the only state that enacted sales tax-related economic presence standards in advance of the Wayfair.
While the USSC’s choice of Wayfair v South Dakota as well as their rationale for overturning Quill is beyond the scope of this article, there were several other states that had enacted similar statutes.
South Dakota clearly indicated that if it were to prevail, its statute would be enforced prospectively. That is, despite a statute that could be enforced retroactively, the state was willing to forego that approach in the spirit of effective tax administration.
In the end, the new digital way the world does business caused the USSC to change its mind and reverse its own decision. While overturning a prior decision is not unprecedented, the concept of stare decisis (keep the status quo), seems to be a guiding principal for the USSC, no matter the era.
And why did the USSC in effect legislate from the bench? The USSC felt it had to step in because Congress has failed to provide a solution. There have been some attempts by Congress to deal with the matter, including the Marketplace Fairness Act of 2013 that never saw the light of day, but no real effort to develop a comprehensive plan. Congress could still take up the issue, but near term that appears very unlikely.
A number of open questions remain regarding the definition of sales. Among these are:
- How many transactions are needed to meet a potential threshold?
- Does any dollar volume threshold include both non-taxable and taxable sales?
- When must a seller start collecting?
- Is there an impact to drop shipments?
In the meantime, there are steps remote sellers can take to effectively deal with Wayfair:
- Review your activities in each state, including existing salespersons’ activities, volume and frequency of sales to states.
- Get to know your products’ footprint. Are products sold to the end user? Are they taxable in the state to which they are delivered? Are you maintaining exemption certificates in support of any sales made for resale? States statutes are not always aligned in which products and services they subject to tax
- Review state statutes. Don’t rush into registering with a state that hasn’t set forth specific requirements. To do so would run the risk that a state would decide to impose tax from the day you initially may have established nexus.
- Review and potentially upgrade your tax compliance function to determine its ability to recognize the taxability of products on a state-by-state level, and potentially collect sales tax in more jurisdictions.
- Consider alternatives to in-house preparation including proprietary software, full outsourcing of the sales tax compliance function or participation in the Streamlined Sales and Use Tax Agreement.
- In the event it turns out there was pre-Wayfair nexus, then consider taking advantage of Voluntary Disclosure programs administered by many states.
Be aware that as of August 13 many states, including Alabama, California, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Washington, Wisconsin and Wyoming have reacted in some fashion to the ruling.
Responses have taken the form of specific guidance or a notice that they are evaluating the decision. Many other states have not responded or do not impose a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon).
While the decision should help reduce competitive inequities experienced by small retailers, it is also anticipated that they will feel some pain from this decision because their compliance resources are often limited.
And if you think that states will stop at sales tax, be ready for the next wave of potential economic presence-driven taxes. Many states, including Ohio and Washington, already impose gross receipts related taxes that do not require physical presence, just that a company is exploiting their market economically.
While these taxes also have a minimum standard that must be exceeded before a tax is imposed (e.g. Ohio sales of $500,000), these taxes are becoming more common.
Because states are finding income taxes are subject to annual fluctuation, can be manipulated, and sellers of tangible property enjoy certain protections from the imposition of net income taxes, they are gravitating to more transaction-based, gross income-type taxes that are easier to administer and harder to avoid.
Please do not hesitate to contact us if you have questions or would like to discuss.