The Supreme Court’s decision in South Dakota v. Wayfair, which removed the physical presence test as a requirement for states to impose sales tax nexus, has altered the sales tax landscape of nearly every state since it was decided two years ago.
On June 21, 2018, the court overturned Quill Corp. v. North Dakota, a 1992 case that imposed the physical presence test on states seeking to collect sales taxes from remote retailers shipping to residents in the state.
“Under Wayfair, simply making some significant amount of sales into a state was enough for a state to require collection of sales tax. That caused a lot of online sellers who had previously not had collection responsibility to suddenly have the responsibility,” said Harley Duncan, managing director and leader of the state and local tax group in the Washington National Tax practice of Big Four firm KPMG LLP.
“In the two years since then, every state except Florida and Missouri has taken some action to establish an economic nexus standard and require remote sellers to collect. In addition, 40 states have enacted legislation to require marketplace aggregators to collect as well,” he said.
“Most states would say that compliance has gone pretty smoothly,” Duncan said. “Larger retailers were used to collecting in multiple jurisdictions, so for them it was a matter of scaling up, building on what they had done and simply accommodating more jurisdictions.”
Duncan sees two areas where sellers face greater burdens and have more difficulty coming into compliance.
“Small remote sellers where the marketplace is not involved may have been collecting in one or two jurisdictions, but don’t have the infrastructure to scale up to 45 jurisdictions,” he said. “They need advice on how to register, where to register, and what’s taxable. The other area involves foreign sellers that sell directly into the U.S. over a website. There’s a greater lack of familiarity with sales tax and collection responsibilities. It’s a much different environment for them. We see efforts to come into compliance, but that’s an area that’s still unfolding.”
So far, the aftermath of the Wayfair decision has been less rocky than originally believed, according to Duncan.
“There are some things that still need to be sorted out over time, but it’s been better than people anticipated,” he said. “For companies now it’s time to take a look back and verify that they got it right, and see if they’re operating efficiently and correctly.”
The aftermath
Has the dust settled from Wayfair? From a government perspective, it has, according to Scott Peterson, vice president of U.S. Tax Policy and Government Relations at Avalara. “Their response to Wayfair is working. But from a business perspective, the dust is still quite a ways from being settled. There still remain a tremendous number of businesses that may have heard of Wayfair but have not evaluated how it impacts their business. They have been too busy selling to understand the full impact and ramifications of Wayfair, or they trust their accountant or bookkeeper to let them know when there’s an issue.”
States began crafting legislation aimed at marketplace facilitators prior to June 2018, noted Peterson. “But then Wayfair came along, and with that green light, states focused on individual sellers,” he said. “They then pivoted back to marketplaces on the second phase of Wayfair.”
“Louisiana passed remote seller legislation two years ago, but it took until now to work out all the details and get to an effective date,” Peterson said. “Marketplaces were just given an effective date of July 1, 2020, to start collecting.”
While the Supreme Court overturned the Quill decision, it did not actually say that the South Dakota statute was constitutional, Peterson observed. “They said it might be constitutional. They liked the fact that South Dakota was part of the Streamlined Sales Tax initiative, with uniform returns and definitions for streamlined states. And SCOTUS liked the free software aspect of SST, with Certified Service Providers available to assist sellers.”
But non-SST states such as California are more likely to face challenges, according to Peterson. “They have no free software, and it’s complicated to get a license in California. The closer they are to South Dakota, the more likely they are to survive a challenge.”
As bad as the pandemic has been, it could have been worse for states without the additional revenue generated by the Wayfair decision, Peterson noted: “States are pleased in general with how it is turning out, but challenges could loom. The issue of lodging taxes is still not resolved. States want to apply Wayfair to lodging taxes, which are very local, typically administered by cities. And states will likely go after food delivery marketplaces like DoorDash and UberEats with marketplace facilitator laws.”
The states have suffered a substantial loss of revenue due to COVID-19, observed Jamie Yesnowitz, State and Local Tax National Tax Office leader at Grant Thornton. “While state actions over the past several years as a result of Wayfair have resulted in increased revenue, the budget gap they’re facing is much larger than the increased amount that is coming in. So while we may see some tweaking of the remote seller rules, most states have already acted on that. We expect to see more aggressive enforcement from state tax authorities over time, and we could see activity on economic nexus provisions for corporate income tax. We saw a few states act on that last year, but there wasn’t much activity this year, in part because many legislative sessions were delayed. However, it could be revisited this summer.”
To the extent states were looking for more revenue, they will eventually concentrate on enlarging the sales tax base to include a wider array of services, or consider rate increase, Yesnowitz indicated.
“Stronger enforcement can drive additional revenue, but the incremental gain from enforcement will not be enough to bridge the gap caused by COVID-19 over the past three months and into the future,” he said. "My sense is we will see a lot of states address the federal components of the CARES Act and determine whether to conform to or decouple from the tax provisions of the CARES Act for purposes of the state corporate income tax.”
North Dakota State Tax Commissioner Ryan Rauschenberger acknowledged the increase in state and local tax revenue as a result of the decision.
“To date, the state of North Dakota has collected slightly over $43 million in in sales and use taxes from remote sellers delivering products into the state,” he said.
Eighteen months after the Wayfair decision became law, the coronavirus pandemic has resulted in a boom in online sales, he observed: “As the nation fights COVID-19, customers have turned to the internet to purchase household essentials including food, clothing, pharmaceuticals and more. Because of the Wayfair decision, states and localities can continue to collect sales taxes on those purchases, providing a bit of stability in these difficult times.”
Nevertheless, complications generated by the differing responses of the states in passing Wayfair legislation have generated numerous issues.
Other than the fact that all but two states have enacted Wayfair rules and most use a $100,000 revenue threshold, there is a wide variety among the states on a number of issues, which makes tracking economic nexus very difficult, according to Jeff Glickman, partner-in-charge of state and local tax services at Aprio.
State rules differ with regard to the following, he noted:
1. The measurement period — most use “previous or current calendar year,” but some use “12-month period.”
2. Grace period — once you reach the threshold, some states are silent on when you must register and begin to collect/remit, which suggests it must be immediate and presents obvious compliance difficulties if sales are made continuously. Other states take a more reasonable approach, essential providing a grace period. For example, Texas regulations provide that a remote seller must obtain a permit and begin collecting tax no later than the first day of the fourth month after the month during which it exceeded the safe harbor threshold.
3. What sales count toward the threshold? State rules vary regarding whether a business is required to count sales for resale, non-taxable services, and/or exempt sales — for example, sales to a nonprofit or governmental agency.
4. Several states — including Virginia and California — require certain related companies to aggregate their sales to determine if they have exceeded the state’s threshold.
5. In states with home rule local jurisdictions, nexus standards may differ. For example, the City of Boulder, Colorado, still uses a physical presence standard for nexus.
In particular, the third point regarding which sales count toward the threshold has made nexus reviews much more difficult for companies, Glickman observed.
“Before Wayfair, a company could track its physical presence — a factual undertaking — and then determine if that presence was enough to require it to collect and remit, including if that particular state subjected the company’s goods or services to sales tax. Taxability research was really only needed once a nexus determination was made,” he said. “But with economic nexus, a company needs to first analyze whether a state taxes its goods and services and then track taxable, non-taxable, exempt, and wholesale sales, essentially requiring the company to perform taxability research in all states in order to properly determine and track its economic nexus obligations. That’s a significant undertaking for these businesses and often requires additional assistance from tax advisors.”
Dan Megathlin, principal and head of Crowe’s National Sales and Use Tax Practice, agreed.
“The implementation of the sales tax registration and corresponding sales tax compliance for remote sellers continues to be fraught with a lack of uniformity among the jurisdictions that almost all but a handful have adopted remote seller rules in light of Wayfair,” he said. In particular, while most jurisdictions have adopted the twin thresholds of $100,000 in sales and 200 transactions, there are a number of areas that reflect a clear lack of uniformity.
“First, there are a minority of jurisdictions, such as Illinois, where the $100,000 threshold is determined by taxable retail sales,” he said. “Aside from this distinction between the majority of jurisdictions which have adopted the taxable/retail sales delineation, in practice this presents a ‘chicken and egg’ issue. In particular, in the minority of jurisdictions which do not adopt the gross sales threshold, is an exemption certificate required to be secured in order for an otherwise taxable sale to be excluded?”
“Second, jurisdictions vary on the grace period for registration once the nexus thresholds are satisfied,” he continued. “Specifically, while some jurisdictions require registration immediately upon the threshold being satisfied, other jurisdictions, such as Colorado and Minnesota, provide for a grace period of 60 days in the case of Minnesota and 90 days in the case of Colorado.”
