It’s hard to escape any discussion of Wayfair these days. This isn’t surprising, as we witnessed history on
June 21, 2018, when the U.S. Supreme Court overturned the physical presence
standard in South Dakota v. Wayfair.
And in doing so, overturned 51 years of precedent that had restricted states
from imposing their sales tax obligations on out-of-state ("remote")
retailers who lacked a physical presence in their state.
Yes, this was indeed a momentous development – one that has dramatically
changed the sales tax landscape in a very short time.
As important as the outcome of
the decision, was the U.S. Supreme Court’s admission that Quill had been
an “incorrect interpretation of the Commerce Clause” both as first
formulated by the Bellas Hess and Quill courts as well as applied
today and one which became “further removed from economic reality” each
year. Calling Quill flawed on its own terms, the Wayfair Court held that: (1) the physical presence rule is not a
necessary interpretation of the substantial nexus requirement; (2) Quill creates, rather than resolves,
market distortions; and (3) Quill
imposes the sort of arbitrary, formalistic distinction that the Court’s modern
Commerce Clause precedents disavow.
It was, for many reasons, the expected decision. Justice
Kennedy, who wrote the majority opinion on Wayfair, had been very clear
in his 2015 opinion in Direct Marketing Association v. Brohl (which dealt with Colorado’s
notification & reporting law), that the time had come for the U.S. Supreme
Court to reconsider Quill. In
2016, South Dakota saw this as an invitation to present the Court
with a case that challenged Quill and wasted no time enacting its
economic nexus law. (For more on South Dakota’s economic nexus law, see this PrietoDion
SALT Whitepaper)
Despite the many arguments the majority voiced for
overturning Quill, Justice Roberts, who authored the dissenting opinion,
made a valid point in his dissent. Even if he agreed that the prior Supreme
Court decisions (National Bellas Hess and Quill) affirming
the physical presence standard were wrongly decided, the Supreme Court’s
majority decision to overturn Quill may have lessened Congress’
motivation to consider the issue. Does the Wayfair decision mean the
U.S. Congress will be less likely, or more likely, to enact a federal
remote seller legislation?
U.S. Judiciary
Committee Holds Hearing to Examine Wayfair Decision
In an effort to further explore whether and what action the
U.S. Congress should take, on July 24th the U.S. House Judiciary Committee
held a Congressional hearing to examine the Wayfair
decision and its ramifications for consumers and small businesses. Judiciary
Committee Chairman, Bob Goodlatte (R-VA), a vocal proponent of a workable,
Congressional solution was quick to issue a statement soon after the Wayfair decision was announced in which
he emphasized his disappointment in the decision and called the Court's
reversal of Quill's physical presence principle "a
nightmare for American businesses and small online sellers." He
added that "the dominant issues under debate in this case involved
policy, not law. The briefs filed with the Court were filled with discussions
of economics, the efficacy of software, trends in the retail industry, and
myriad other non-legal questions” and added that “Congress is the appropriate
institution to resolve these policy questions, not the Supreme Court." In his opening statement at the July 24th
hearing, he stated that “the Court could
have left resolution of this issue to Congress, to which the Commerce Clause
grants the ultimate authority to regulate interstate commerce.”
Federal Remote Seller
Proposals
At the July 24th hearing there was testimony from parties stating
that a Congressional solution was still needed to bring uniformity and parties
stating that Congressional action was no longer required now that Wayfair
had been decided. (You can hear the entire Judiciary Committee hearing and read
each witness’ testimony here.)
As of August 1st, four federal remote seller
proposals have been introduced by the 115th U.S. Congress. Although
the Judiciary Committee hearing did not focus on any one specific federal proposal
(the idea was to explore whether Congressional action was still warranted) it
should be noted that two of the federal proposals aim to limit states’
collection authority by bringing back the physical presence standard overturned
by Wayfair. Given Chairman
Goodlatte’s outspoken criticism of the Wayfair
decision, a key focus was reviewing whether Congressional action that would
rein in the states newly expanded authority was needed.
In reviewing the four federal proposals, it should be noted
that they focus on two opposite goals.
Two of four proposals, the Marketplace Fairness Act of 2017 (S. 976)
and Remote Transactions Parity Act of 2017 (H.R. 2193),
would grant “collection authority” to states that simplify their sales tax
administration (such as is required of Streamlined Sales Tax member states) and
comply with other requirements detailed in the proposals. The other two federal proposals, the No
Regulation Without Representation Act of 2017 (H.R.
2887) and the Stop Taxing Our Potential Act of 2018 (S.
3180) would limit Wayfair’s
impact and states’ collection authority by codifying a physical presence
standard.
Since the primary goal of the Marketplace Fairness Act (MFA)
and the Remote Transactions Parity Act (RTPA) is the granting of “collection
authority” to states - authority which would allow states to impose their sales
tax collection obligation on remote sellers even if they had no physical
presence in the state - it might seem that these proposals are no longer
necessary post-Wayfair. In effect,
because Wayfair removed the
physical presence standard, Wayfair has
already permitted states to have this same collection authority. However, post-Wayfair, states are free to adopt
economic nexus standards that can vary from state to state. The MFA or RTFA
would impose similar requisites on all states thus lessening the complexity
created by states adopting a myriad of economic nexus rules.
The two other federal proposals, the No Regulation Without
Representation Act and the Stop Taxing Our Potential Act (STOP), would prohibit
a state from imposing a sales tax collection duty or information reporting
obligation on a “person” who does not have a physical presence in the state. Both
proposals define what constitutes a physical presence, as well as what
activities would be considered a ‘di-minimus’
physical presence (which would be insufficient to be considered a physical
presence that would allow a state to impose its tax collecting and remittance obligations
on a remote seller). Under both proposals, commonly recognized direct
activities, such as having a retail store, manufacturing operation, owing or
leasing property or having employees in the state would be a nexus creating
physical presence, but engaging marketing affiliates (which create nexus in
states with click-through nexus laws) would be considered a ‘di-minimus’
physical presence.
Are States Rushing to
Adopt Economic Nexus Too Quickly
Prior to and after the decision was announced, I was asked
about my thoughts on Wayfair. I noted in this "Reflections
On The Supreme Court's Reflections On Sales Tax" article by
Peter Reilly, a contributor at Forbes.com, my concern that if the physical
presence standard was reversed the flood gates would open and many more states
would see this as an opportunity to enact South Dakota styled laws – focusing
solely on revenue and transaction thresholds to assert sales tax
nexus. And this is indeed what has
occurred. As of September 1st,
more than half of states in the country have adopted economic nexus.
While some states have adopted economic nexus through legislation, others have
done so by updating their existing regulations or drafting new economic nexus
regulations, and yet others are simply adopting economic nexus through
administrative policy. By the way, if
you're wondering which states have adopted economic nexus, see my blog article
at SalesTaxSupport.com, “States
Follow South Dakota: A By-State Guide on Economic Nexus.” Here
you’ll find an Economic Nexus Chart that lists every state that has adopted
economic nexus, the economic thresholds (sales and/or transactions in each
state), the law's effective date, as well as links to the different state
websites, press releases, FAQs and other state resources where helpful
information can be found.
In creating the Economic
Nexus chart, I reviewed every bill, regulation and administrative
policy document explaining the various states' economic nexus provisions and
can confirm that there is indeed a lack of uniformity. For instance, some
states base their economic revenue threshold on taxable sales, others
mention retail sales, others mention gross sales and others explicitly state
that both taxable and exempt sales are to be considered in determining if the
sales threshold has been exceeded. The revenue dollar amount also
varies by state. While many states have adopted the same "more than
$100,000 in sales" used in South Dakota, the revenue threshold in
some states is as low as $10,000 and in others, as high as $500,000.
Also, in some states, a remote seller must meet both the revenue and transactions thresholds, while
in other states, meeting either the
sales OR transactions threshold will trigger nexus. Additionally, in some states, the economic
nexus law is tied into the state’s notification and reporting law. In these states, remote sellers that meet an economic
nexus revenue threshold must either register to collect and remit or comply
with the state’s notification and reporting law. Another area lacking
uniformity is the period is used to measure when a remote seller meets the
economic nexus thresholds. While many states use a prior or current calendar
year measurement period, other states use a rolling “prior 12-month period” or
“prior 4 quarters” period.
Sylvia's Summation
On June 21, 2018, the U.S. Supreme overturned the physical
presence standard first established in National
Bellas Hess and re-affirmed in Quill. With the physical presence standard removed,
states were free to adopt economic nexus.
And states wasted no time – as of September 1st, more than
half of the states in the country have adopted economic
nexus. In his opening statement at the July 24th hearing, Chairman
Goodlatte highlighted that "retailers should not be getting different
answers from different states." But with more and more states adopting
economic nexus, “different answers from different states” is exactly what
remote sellers are getting. Which brings
us back to the question – is a federal solution still needed? It may very well
be.
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Are you an online retailer interested in a tax
consultation? Submit a contact request or email Sylvia Dion at
sylviadion@prietodiontax.com
About the Author: Sylvia F. Dion, CPA
is the Founder and Managing Partner of PrietoDion Consulting Partners
LLC, a State & Local Tax (SALT) Consulting firm providing
comprehensive tax services to U.S. and International businesses. Sylvia’s 25
years of multi-faceted tax experience includes holding leadership positions
with some of the highest regarded international accounting firms and providing
SALT services to companies around the world. From 2011 through 2019, Sylvia
also served as a contributor to the SalesTaxSupport* blogs, where she blogged
on Internet Sales Tax and Economic Nexus, U.S. Sales Tax for Foreign Sellers
and Massachusetts Sales Tax. Sylvia is also a speaker and author whose articles
have been published by Bloomberg BNA and in other leading professional tax
journals and is the author of “Minding Massachusetts,” a quarterly column
published by Tax Analysts’ State Tax Notes. Sylvia is also fluent in Spanish.
For more about Sylvia visit the her firm website at www.prietodiontax.com or www.sylviadioncpa.com. You can
follow Sylvia on twitter and
on Google+ and
can contact Sylvia via e-mail at sylviadion@prietodiontax.com
*SalesTaxSupport was formerly a sales tax resource
website which closed on March 1, 2019. Many of Sylvia's posts previously
published on SalesTaxSupport have been republished here at "The State and
Local Tax 'Buzz' " blog.
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