When New York first passed its law defining what constitutes a “vendor” subject to collecting sales tax in the 1980’s, the idea of online shopping sounded like science fiction. In retrospect, NY may have effectively enacted the first “economic nexus” law when they drafted their definition of “vendor” to include a person who regularly or […]
South Dakota v. Wayfair – Sales Tax Expert Q&A Webcast Recap
On June 27, Sovos hosted a live Q&A webcast, “The Supreme Court’s Decision on South Dakota v. Wayfair: Live Q&A With Our Regulatory Experts,” to give tax professionals an opportunity to get answers to their most burning questions. Below is a brief recap of what was covered by our Director, Regulatory Analysis, Chuck Maniace, and Industry Relations Advisor, Alex Koral.
What the SD v Wayfair Court Decision Essentially Means
The Supreme Court squarely decided in favor of the state of South Dakota and in so doing have essentially overruled their own previous opinions in the famous 1992 Quill case, and the late 1960s National Bellas Hess case. Those two cases together stood for the previously rock-solid proposition that the requirement to collect and remit sales tax can only be put on a seller if that seller has a physical presence in the jurisdiction. And we’ve always loosely defined that as people and property.
That constraint no longer exists and has been replaced with a less formalistic standard – U.S. states are now free to amend their laws, or their rules, to impose this tax requirement based exclusively on “economic presence.”
Specifically, nexus laws will be evaluated against the four-part test outlined in the 1977 Supreme Court case of Complete Auto Transit v. Brady, which asks whether:
- There is a sufficient connection between the taxpayer and the state imposing the tax. That requirement is often referred to as “substantial nexus.” In South Dakota, if you have more than 200 transactions or more than $100,000 in annual sales associated with South Dakota transactions, then you have substantial nexus. (Just for everybody to be clear, it is an “or” standard.)
- Is the tax fairly apportioned? Meaning, is the state only taxing its fair share of that transaction?
- Is the tax non-discriminatory? Meaning, does it favor a certain type of businesses over other businesses? For example, does it favor in-state businesses over out-of-state business?
- Is the tax fairly related to services performed in the state?
So, the old bright-line rule of physical presence has now been replaced with a bit more substitutive facts and circumstances test to determine whether a particular state nexus standard will pass constitutional muster. Will state court challenges be raised against economic nexus rules that have been or will be enacted across the country? It’s certainly possible and only time will tell.
As for South Dakota, the requirement is technically not effective yet because the Supreme Court remanded the case back to the South Dakota state court, but they did it in a way that makes it pretty clear that that the law is on solid footing. So, there’s no reason to believe that this case will be tied up in extended litigation and every reason to believe that South Dakota will be enforcing its economic nexus standard shortly.
Burning Questions on Sales Tax Nexus from Our Audience
Q: I haven’t seen any information coming from other states about registering for sales tax. What immediate action should we be doing now?
Charles Maniace: First, start looking at your numbers throughout the country. Evaluate whether, in any given state, you would meet a standard that is similar to what South Dakota articulated and what the Court appears to find acceptable. For any state where you think you have more than $100,000 worth of sales or more than 200 transactions, there’s a bit of a risk there, so monitor whether or not those states move to start taxing remote commerce.
Postscript: Louisiana and Vermont have issued guidance (Louisiana by statute and regulation and Vermont by Press Release) indicating that calculation and remittance requirements kick in effective July 1 – both using the $100,000 / 200 transaction standard.
Also, start to evaluate whether your solution today, whatever it might be, is scalable for tomorrow. Can you scale up this activity to account for X amount of more states in the next couple of months? And then X amount of more states on top of that over the next couple of years? The time is now to start evaluating whether your existing sales tax solution is readily scalable to handle a substantially increased compliance obligation.
Q: There are approximately 17 states that have similar economic nexus rules. Some of them are effective in the future, some upon Supreme Court decision, and some of them are held up by a separate challenge. What can we expect from other states now that they have the decision coming down? Where else should we be worried?
CM: For the remaining states that haven’t enacted an economic nexus law or rule, it’s helpful to think about them in two buckets: those states that would need to enact a statute to revise their nexus laws and those states that could potentially enact an economic, or virtual, nexus rule through regulation. This view is important because regulations can be enacted more quickly than statutes and the possibility of being exposed to an expanded collection and filing requirement is more immediate. But I believe any state that isn’t a nomad state (like NH, MT and DE) will look to enact something a lot like South Dakota. The potential revenue is really too large to ignore.
Q: What about those states like Vermont and North Dakota that wrote their laws to read it becomes effective the moment the Supreme Court decides?
CM: Technically, they don’t have to wait any longer. We know that North Dakota issued a statement that recognizes this fact and said, “Wait, and we’ll be coming out shortly with some official guidance about how this requirement is going to be enforced.” The same is the case in Vermont, which has a law that becomes effective the first day of the first quarter after the South Dakota vs. Wayfair decision comes down. So we could see, in very short order, requirements in South Dakota, North Dakota, and Vermont.
There are another handful of states, like Tennessee, Alabama, Indiana and Wyoming that have their own individual state litigation separate from Wayfair that are essentially rendered moot by the decision of the Supreme Court. It could be, when those cases are dismissed, those laws come into effect fairly quickly.
Hawaii, I believe, has a two year retroactivity period in its bill. It has a history of imposing requirements regardless of physical nexus as it historically viewed its “General Excise Tax” as not being constrained by the Quill doctrine. I think something that’s retroactive is going to be a bit more of a challenge and could be subject to litigation if there are any businesses out there willing to pick up the challenge.
Postscript: In their 2018 special session, the Louisiana legislature passed a bill (HB 17) re-defining the term “dealer” to include remote sellers that have more than $100,000 in sales or make more than 200 separate sales into Louisiana. While Louisiana created a Sales and Use Tax Commission on Remote Sellers to study the issue, Revenue Information Bulletin 18-019 makes it clear these changes nonetheless went into effect July 1, 2018.
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Q: How does the South Dakota v. Wayfair decision affect global sellers or the territories? How might Puerto Rico or Guam change the rules?
CM: Technically, this would compel global companies located outside the territorial limits of the United States to collect and remit sales tax when they sell inside of the United States, because their lack of physical presence inside the United States isn’t going to be considered a barrier anymore. Whether or not state and local auditors have the energy, or willingness, or financial ability to audit global sellers with headquarters outside of the United States remains an open question. But technically foreign sellers will have an obligation to collect sales tax.
There’s a large global movement afoot to require out of country sellers to collect sales tax when they sell into a country or VAT in this case. For example, in all of Europe, and in a number of additional countries today, when a U.S. seller sells something that’s called an electronically supplied service, the seller is required to collect VAT on that electronically supplied service. That’s a massively growing trend. This kind of adds to that trend of global taxation based on the destination jurisdiction. Yes, it does involve global, and yes it’s only fair. The U.S. is jumping on a bit of a trend there.
Guam is on the verge of imposing a sales tax; they don’t today. Puerto Rico has had a sales tax, the IVU, for at least 10 years. Puerto Rico, as a U.S. jurisdiction, was bound by the previous physical presence standard and will be allowed to enact economic nexus standards based on the Wayfair case.
Q: How does South Dakota vs. Wayfair effect in-state sellers?
CM: This case really affects interstate commerce and leaves the INTRAstate issue up to the states themselves. As a reminder, most (but not all) states say when a transaction happens between two locations within a state, it’s the destination location upon which local tax is based.
What will be really interesting is whether more states will work to make inter-state taxing rules more simple – for example, will they enact similar rules in Alabama (and now Louisiana) that allow remote sellers to collect based on streamlined and simplified tax rules? We shall see.
View the onDemand webinar, South Dakota vs. Wayfair Supreme Court Decision – Live Q&A with Regulatory Experts to learn how the Supreme Court’s ruling will affect your eCommerce sales tax compliance process, best practices to ensure compliance in states where you have nexus, how this decision could trigger similar legislation in other states, and what you need to worry about now. Looking for tools? Start here to automate and optimize vendor invoice sales AND use tax accuracy on purchases or improve exemption certificate management capture, validation and retrieval.
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