Over the last year, there has been a tremendous amount of chatter among the sales tax cognoscenti about the case South Dakota v. Wayfair, which the U.S. Supreme Court is poised to publish its ruling on soon. Indeed, on this blog alone since January you can find several original posts, including on what the case is about , predictions of how states will react, how to read the appellant’s Court briefs, a webcast on the case, our immediate response to the oral arguments, and a more nuanced review of the Justices’ questions.
But so much of what you read seems to assume that the Court will in some way amend the current rules surrounding what constitutes nexus, and therefore when states can impose on businesses an inherent obligation to collect sales tax. We thought, then, that it would be interesting to explore what might happen if that does not come to pass: what if Wayfair wins?
After Careful Deliberation, Nothing Changes
Rather than rehash all the details of Wayfair, we’d recommend that you read one of our past posts listed above. But to at least summarize, Wayfair is all about a state (South Dakota) attempting to require remote sellers to collect and remit sales tax on their sales in the state, despite those remote sellers having no connection to the state besides delivering goods to residents there. This is in direct contradiction to the current rules about when a state can impose that requirement, which the Supreme Court last affirmed in the 1992 case Quill v. North Dakota. As such, Wayfair, a large online retailer, challenged the South Dakota law leading to the case heard by the Court in April.
In Quill, the Court determined that “physical presence” was the standard that would designate when a business had nexus, and thus a sales tax obligation, in a state. In Wayfair, South Dakota is in effect asking the Court to recognize that times have changed, and that physical presence standard should no longer be applicable. However, a South Dakota win is not in any way guaranteed, he Court could very easily rule in favor of Wayfair and reaffirm the physical presence standard. (Let’s also assume that the Court’s decision is final and it doesn’t remand the case for further litigation in lower courts.)
The immediate result would really only affect the South Dakota law: it would be found invalid in light of the physical presence standard and thus the state couldn’t enforce it. South Dakota could not then compel Wayfair to begin collecting sales tax on its sales to the state, and the status quo would prevail.
From there, though, the ripples would spread. Several other states have passed bills similar to South Dakota, establishing an “economic nexus” standard, in anticipation of the state succeeding in this case. With Wayfair prevailing instead, these bills would then also be effectively invalid and unenforceable.
States May Press Beyond Physical Presence Nexus Rules for Sales Tax Collection
However, that doesn’t mean the bills would just go away. Indeed, the fact that many other states have bills similar to South Dakota’s on their ledgers means that many other states would be primed to take up South Dakota’s mantle and attempt to get their bills validated through litigation. It’s rather unlikely that these states would prevail where South Dakota so recently failed. It’s also unlikely the Supreme Court would (any time soon) hear another similar argument. But it’s possible that if these other states were to litigate their bills, they could succeed.
One of the issues that some Justices seemed to have with the Wayfair case was the scant record on how much revenue states are losing and how costly it would be for businesses to comply with having a sales tax burden in many more states. A new case could flesh out these details in a way that provides the Justices the factual grist they need to rule in favor of the state.
So while an unfavorable ruling in Wayfair would be a big setback for states trying to expand their sales tax collections, it would not mean that states would give up their efforts to move beyond physical presence nexus rules.
Indeed, it would be extremely likely that states would redouble their efforts to stretch the definition of physical presence nexus as much as possible. Last year, Massachusetts passed what are being called “Cookie nexus” rules, which posit that installing tiny bits of tracking software (i.e. “cookies”) on instate computers constitutes having a physical presence in the state. Such a rule follows other such expansions of physical presence, such as New York’s “click-through nexus” rules. If South Dakota fails to get its economic nexus rules approved by the Court, we can fully expect more cookie and click-through nexus rules to pass.
A different path that states could follow (and indeed, many are already doing) would be to pass laws similar to Colorado’s Notice-and-Reporting requirements. These are technically not sales tax requirements (and so were upheld by the Supreme Court in 2015), but instead impose a burden on non-tax collecting businesses (i.e. remote sellers) to assist the state with its collection of use taxes by issuing notices to their customers that sales tax was not collected and then filing an annual report with the state revealing their sales in the previous year. (Use taxes are the ancillary to sales taxes; when sales tax is not collected at the time of sale, the purchase is supposed to make up the difference and pay the state for their use of the goods or service in the state.)
Many states have already followed Colorado and established Notice-and-Report rules for remote sellers selling over a certain threshold into the state. In the absence of a change to the physical presence nexus standard, it’s very likely that similar bills will spread across the country.
It is a fool’s errand to predict how exactly the Supreme Court will rule on Wayfair. The oral arguments revealed the many considerations that are affecting the Court’s decision, which put to play prior predictions that the only question was how extensively South Dakota would prevail. But however the Court does rule, whether to maintain the Quill standards or to approve of South Dakota’s economic nexus rules, there will be a wave of knock-on effects as states react.
We at Sovos are preparing for the Court’s decision, and will be presenting a webinar on what we can glean from its opinion once it’s been published. Join our Director of Regulatory Analysis, Chuck Maniace, on June 27 as he reviews what the Court has said and what it means for the world of sales tax compliance.