While the landmark South Dakota v. Wayfair Supreme Court decision flipped the traditional physical presence nexus standard on its head, the foundational requirement in the Commerce Clause of the U.S. Constitution prohibiting states from enacting tax requirements that discriminate against or unduly burden interstate commerce remains. As we approach the Wayfair fifth anniversary, this principal has become more important. With the expanding significance of sales tax in funding critical government functions, states must take meaningful steps to ensure their tax laws and rules can be readily complied with by local and remote sellers alike.
While nobody knew it at the time, the expanded authority of states to tax remote sellers became a major contributing factor in keeping states afloat during the early months of a global pandemic. The dire predictions of state budget shortfalls were transformed into significant surpluses, which persist in many states to this day. U.S. states learned what most of the world already knew: consumption taxes are a highly reliable and consistent source of state revenue.
Last year, the Tax Foundation published data showing that for FY 2020, while individual income taxes still represented the largest source of state revenue, sales tax, at 32.2% was growing in importance. Likewise, a recently issued GAO report showed that nationwide sales tax revenue approached $30 billion for CY 2021. This growing confidence in sales tax collections contributed to no fewer than 10 states enacting individual income tax rate reductions and six states reducing their corporate tax rate.
What have states been doing post-Wayfair?
In the first few years post Wayfair, a handful of states took steps to simplify their sales tax. The Alabama Simplified Sellers Use Tax and the Texas Single Local Use Tax Rate represent notable attempts to make the complexities created by local tax requirements more manageable for remote sellers. In 2021, New Mexico abandoned origin-based local sourcing in favor of simplified destination-based rules and made the rates paid by in-state and remote sellers uniform. Tennessee dropped its complex requirement for drop shippers and Florida finally eliminated its pesky bracket requirements in favor of the basic (5/4) rounding rules we all learned in grade school.
Every state that has home-rule administration of local taxes attempted some form of meaningful simplification. In addition to the Alabama simplification discussed above, many localities in Alaska banded together to form the Remote Seller Sales Tax Commission, creating uniform local ordinances and remote seller collection requirements. Similarly, many cities in Colorado joined the Sales and Use Tax System (SUTS) program enabling a single portal for local remittance. The Sales and Use Tax Commission for Remote Sellers attempts to provide similar simplification for sellers in Louisiana.
Are these simplifications sufficient? Some taxpayers and politicians are suggesting it is not. Companies have initiated litigation in both Louisiana and Colorado suggesting that despite the efforts noted above, the tax requirements in both states represent an undue burden on interstate commerce. In recent months, the U.S. Senate Finance Committee held a hearing, “Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales,” and the Government Accountability Office issued a report suggesting that “Congress consider working with states to establish nationwide parameters for state taxation of remote sales.”
Given that both the courts and Congress have been actively engaged in evaluating the complexity of existing sales tax requirements, the time seems right for states to consider how they might take matters in their own hands in ensuring their tax requirements are sufficiently simple to pass Constitutional muster.
Want to read more about the case for sales tax simplification? Download the full white paper.