Which States Can Still Improve Sales Tax Post-Wayfair?

In the five years since the Supreme Court case of South Dakota v. Wayfair, Inc., every state with a sales tax has enacted a law regarding economic nexus. However, Wayfair did not change the constitutional requirement that sales tax cannot represent an undue burden on interstate commerce. To the contrary, it can be argued that an expanded ability to tax remote commerce creates an expanded obligation to keep tax simple. While some states have made great strides to simplify their approach to sales tax, there are also some that have more work to do. Here, we discuss the states that might want to think about doing a little more.

Hawaii

Hawaii was one of the very first states to begin imposing tax on remote commerce, doing so on July 1, 2018, when the ink was barely dry on the Wayfair decision. Since then, the Aloha State has done little to make its tax simpler.

Hawaii’s sales tax is structured as a General Excise Tax (GET), which makes it fundamentally different from most of the rest of the country. While sellers are not legally obligated to charge the GET to their customers, when they do, they must include the tax itself within the taxable base – creating a “tax on tax” effect. So, if you sell a $100 taxable item into Honolulu where the total state and local GET is 4.5%, the proper tax is not $4.50 but rather $4.71 as “tax-on-tax” transforms a 4.5% rate into an effective rate of 4.71%.

On top of that, Hawaii is the only state that imposes its tax on resale transactions, at the special “wholesale” rate of .5%. Hawaii is also the only state requiring marketplace sellers to remit tax, at the wholesale rate, on sales where a marketplace facilitator collects and remits GET on the sale to the final customer.  These two significant differentiators make tax compliance in Hawaii particularly challenging for remote sellers.

Illinois

Illinois is another tough state compliance-wise. It is an origin-based state when it comes to local tax and the city of Chicago is a home-rule locality with several unique taxes, including an Amusement Tax and a a Personal Property Lease Transaction Tax. In the name of equalizing the compliance burdens faced by in-state and remote sellers, Illinois enacted several rules directed at “Leveling the Playing Field.” Once completed, the state published a flowchart demonstrating the compliance requirements for in-state companies, remote sellers and marketplace facilitators. Navigating your way through the chart isn’t exactly easy but, in the end, fully remote sellers with economic nexus always collect “Retailer’s Occupation Tax” based on the customer’s location. This likely includes Chicago tax since Chicago has adopted its own economic nexus standard.

However, the rules change for out-of-state retailers that have physical presence in Illinois. In some circumstances, Retailer’s Occupation tax is due based on the origin rate and in others, the 6.25% state-level use tax is due, with no local tax applying at all. Illinois has taken some other steps to make tax a little simpler, including publishing a “boundary file” that specifies the correct combination of local rates for a given street address. Even so, the boundary file is enormous, making its effective utilization a challenging prospect. Despite clearly trying, tax compliance in Illinois remains complex and unwieldy.

Michigan

Michigan recently found its way on the roster of states that make sales tax compliance challenging. Michigan should be lauded for being a full member state of the Streamlined Sales Tax Governing Board and adopting all the attendant simplifications and uniform definitions. Additionally, the absence of local rates (aside from a small handful of special motor vehicle rental rates) makes compliance in Michigan reasonably straight forward.

However, the approach taken with respect to the substantial tax base changes reflected in recently enacted HB 4039 represents one of the primary reasons why remote sellers argue nationwide sales tax compliance can seem extraordinarily challenging sometimes. In this bill, which was signed by the governor on April 26, 2023, the state opts to exclude delivery and installation charges from its sales tax base. Facially, there is absolutely nothing wrong with that. Michigan believes that delivery and installation charges are taxed inconsistently across the state and that the best course for its citizens is to exclude these charges from tax. States should absolutely feel free to make changes of this type.

The problem, and it’s a serious one, is that the bill became effective immediately upon the governor’s signature. Now, freight and installation charges are already taxed differently across the country and tax technology providers all support functionality around freight and installation. Further, best-in-class providers were tracking this bill closely and stood ready to issue late breaking solution updates reflecting this change that were in place within days of this bill being signed. However, fundamentally, almost every seller—especially remote sellers—will charge for delivery. Making a change of this type, with no advance notice and no thoughtful published guidance provided in advance, is exactly the type of activity that opponents of remote tax collection seize upon in suggesting that sales tax compliance can be unduly burdensome.

Missouri

On January 1, 2023, Missouri was the last state to adopt an economic nexus standard. Since the bill enabling economic nexus was enacted in June 2021, there was considerable hope that the state would use the intervening year and a half to enact thoughtful simplifications.

While not as tough as home-rule jurisdictions like Colorado and Louisiana, Missouri does have some challenging local tax rules. Missouri also allows localities to adopt, or not, local seller’s use tax. The bill enabling economic nexus also empowered the Missouri Department of Revenue to work with the Streamlined Sales Tax Governing Board, or otherwise engage with certified tax automation providers. At least initially, the tax automation and business communities were optimistic.

While several localities have adopted a compensating seller’s use tax to generate tax revenue from remote commerce, other simplifications were not forthcoming. This represents an opportunity lost and further bolsters the arguments of those who contend that nationwide sales tax compliance remains particularly challenging.

Concluding thoughts

Despite these complexities, it’s possible for companies large and small to manage their sales tax collection and remittance obligations. Robust tax automation goes a long way to easing the compliance burden. However, if states genuinely want to ensure their ongoing authority to tax remote commerce, being constantly vigilant for opportunities to make their tax rules more straightforward will be time well spent.