Wayfair Weighs in on Upcoming Nexus Litigation

In just a few short days (on April 17) the United States Supreme Court will hear oral arguments in the case of South Dakota v. Wayfair Inc. At stake is the future of the “physical presence” standard in determining a retailer’s obligation to collect and remit state and local sales tax throughout the country.

While we won’t know what the Justices will decide sometime this summer, last week, the “respondents” in this case (Wayfair, Overstock, and Newegg) submitted their written brief to the Court. What they said provides tremendous insight into their belief as to what will be important to the Justices as they weigh this decision. For those of you who do not have the time (or inclination) to read their 66-page argument, the main points can be summarized as follows:

1. That e-commerce is already (largely) taxed today and that the tax gap caused by the prerequisite of physical presence is overstated

2. Sales tax collection software is not a “silver bullet,” eliminating the challenges associated with multistate sales tax compliance

3. Dropping the “physical presence” requirement will impact smaller businesses, who are not equipped to comply

4. A decision in favor of South Dakota would expose thousands of sellers to retroactive liability for tax associated with transactions that may have happened years ago

In short – they are doing their best to leave the Court with the impression that acting could potentially cause chaos. That sales tax compliance remains incredibly complex, eliminating the physical presence standard exposes small to medium sized businesses to both prospective and retroactive liability for requirements they cannot meet, all in the name of claiming tax on a relatively small share of the economic pie. All in all, they would rather that the Court kick this issue over to Congress, who, theoretically, could carefully balance the economic interests at stake and articulate a clear national standard that requires true simplification by the states and protects small sellers.

As a solution provider, I was particularly struck by their argument regarding the software being unable to make sales tax compliance a manageable and affordable requirement. The authors contend that automation does not address the complex requirements of sourcing, non-uniform product definitions, caps, thresholds, bundled transactions, shipping charges, refunds, discounts, and tax holidays. This is, of course, not true. Sales tax software is particularly well suited (and fundamentally designed) to address these very requirements.

However, their strategy is not without merit. A valid argument exists that states have not exactly gone out of their way in making sales tax compliance easy. While the member states of the Streamlined Sales Tax Agreement have made significant strides over the last 15 years, complex registration, filing and taxability rules still prevail in many parts of the country. States have not necessarily taken a leap of faith in prospectively designing tax requirements that can be readily met by sellers from around the globe, large or small.

Whether the Court is persuaded by Wayfair, Overstock and Newegg’s arguments remains to be seen. However, even if that be the case, businesses need be aware that a decision retaining physical presence will not be the end of the story. E-commerce sellers that don’t collect tax cannot rest easy. If the Court opts to continue the status quo, states are likely to redouble their efforts in enacting rules that purport to work within the confines of physical presence (notice, affiliate/click-through nexus, cookie nexus, etc.) but stretch it as far it can possibly go in the name of capturing more and more of the e-commerce pie.