In the year since the Supreme Court issued its decision in South Dakota v. Wayfair on June 21, 2018, states have moved quickly to take advantage of the new revenue stream it afforded.
“It’s gone from zero percent of states that have the ability to have remote sellers collect sales tax to 100 percent in the past year,” said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, former executive director of Streamlined Sales Tax Governing Board and former sales tax director at the South Dakota Department of Revenue. “No other state tax policy has gone nationwide this fast -- it took just 11 months.”
“Wayfair has totally changed the state tax landscape, and both states and taxpayers are facing new challenges,” said Christine Boeckel, deputy editorial director at Bloomberg Tax. “The primary challenges for states after Wayfair relate to establishing and enforcing new economic nexus provisions. There are new grey areas with respect to the timing for when nexus is created, and what’s included and excluded from economic nexus threshold calculations. Businesses face the challenge of determining whether they have nexus based on new standards, which may not yet include complete guidance from their perspective.”
“These challenges are not limited to U.S.-based businesses,” she noted. “International, non-U.S. businesses now face questions of whether they have tax collection obligations for states’ sales and use taxes. However, there is a practical issue of whether states are able to enforce collection against these non-U.S. entities.”
The 19th annual Bloomberg Tax Survey of State Tax Departments found that states with an economic nexus standard for sales tax more than doubled in the wake of the Wayfair ruling, according to Boeckel. Thirty-three states responded that they now have an economic nexus standard in place for sales tax nexus. Six states said they have an economic nexus standard that is not currently being enforced due to the legislation’s effective date, or pending litigation.
“And Wayfair’s impact isn’t necessarily limited to sales and use tax,” Boeckel cautioned. “There are real questions of whether sales tax nexus is ‘contiguous’ to income tax nexus under post-Wayfair economic nexus provisions.”
Geoff Christian, managing director at Top 100 Firm CBIZ MHM, agreed. “Why should there be different nexus for different types of taxes? It makes sense for a state to decide if you have nexus for sales tax, you also have nexus for income tax,” he said. “The counter argument is that with income tax, there has to be a connection to the activity that generates the income the state seeks to tax,” he said. “The sales tax analysis is different.”
“Some states are dropping the number of transactions as part of the threshold and just have a sales dollar threshold,” Christian observed. “If you sell 200 items at a dollar each, you cross the 200 transaction threshold even though you only made $200. It makes sense to get rid of the number of transactions as part of the threshold. But so far, no one has said what constitutes a transaction.”
Where are the lawmakers?
Congress should step in to help ease the confusion, suggested Marvin Kirsner, a shareholder at law firm Greenberg Traurig. “It’s surprising that Congress hasn’t yet stepped forward and passed legislation that would simplify internet sales tax collection. They could require that sellers only have to file one return at one rate, with one audit per state, instead of audit exams by local governments. This has been proposed, but it hasn’t gained any traction.”
Not only mom and pops, but larger businesses are affected, he noted. “A lot of businesses are struggling,” he said. “Some businesses that are big, but not big enough to have their own tax departments like the big players, are struggling.”.
But don’t look for legislation simplifying nexus requirements across state lines, Boeckel indicated. “Federal legislation regarding sales tax nexus is unlikely to be enacted,” she said. “The reason for that is that nexus is complicated and would require agreement on detailed standards to be applied across states with different policy objectives.”
The lack of clear guidance from the court has contributed to uncertainty, according to Avalara’s Peterson. “As much as people tried to guess the outcome, people thought there would be a new bright line. There wasn’t,” he said. “SCOTUS went out of its way to talk about the South Dakota law, but it didn’t say that South Dakota’s law was the new standard for other states to follow. This was much discussed a year ago, and important to remember today -- it underscored the extent to which the majority of states wanted to pass their legislation quickly, and indeed they have.”
But there have been growing pains along the way, Peterson indicated. “These were not unexpected. Neither states nor businesses were ready when the decision came down,” he said. “South Dakota didn’t expect to win, and other states were betting that SCOTUS wouldn’t decide for South Dakota.
“Three states’ laws went into effect nine days after Wayfair -- Hawaii, Maine and kentucky -- which added to state confusion on how to move forward,” he continued. “States couldn’t predict when the court would issue its decision, so these three states already had legislation passed and lined up to go live. “
Although the majority of states acted very quickly to get legislation done, three states have yet to act, according to Peterson. “It’s surprising to me that Kansas, Missouri and Florida have not yet passed legislation,” he said. “Ohio and Massachusetts have been slow, but will have legislation passed this year. And Arizona has just approved legislation enacting Wayfair-style economic nexus requiring remote sellers and marketplaces to start collecting sales tax, effective Oct. 1, 2019. The threshold for marketplaces is $100,000 in sales. The threshold for remote sellers is $200,000 in calendar year 2019, $150,000 in calendar year 2020 and $100,000 in calendar year 2021 and thereafter.”
An open door
“Wayfair opened the door for states to expand their nexus policies to account for new business models, including marketplace facilitators,” said Boeckel.
In fact, much of the action at the state level now centers on marketplace facilitators. “It’s gaining steam quickly and becoming a major trend among the states. They would much rather get one return with information from 5,000 retailers than have to deal with a separate return from each one,” she said.
Moreover, marketplace facilitators collect from every retailer, regardless of how small the amount of sales or the number of transactions, he explained.
This year, the Bloomberg Tax Survey of State Tax Departments added questions regarding sales made on marketplace platforms, Boeckel noted.
“Thirteen states said they require third-party marketplace facilitators to collect and remit sales tax on sales made by out-of-state corporations using their platforms,” she said. “Of these 13 states, only nine said that the marketplace seller is relieved of the liability for the tax if the third-party marketplace facilitator is required to collect and remit the tax on their behalf.”
“We also asked whether nexus is created when an out-of-state corporation makes sales into the state through a third-party facilitator,” Boeckel said. “In the majority of states, using a third-party facilitator creates nexus when the facilitator stores inventory in the state. However, in most states, the out-of-state corporation will not have nexus just because the third-party facilitator does.” AT
