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Retailers’ guide to the Wayfair decision

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On June 21, 2018, the U.S. Supreme Court issued its much-awaited decision in South Dakota v. Wayfair. In its ruling, the court overturned the precedent set in its 1992 Quill Corp. v. North Dakota ruling that prevented states from requiring online and other “remote” sellers to collect their sales tax unless the seller had a physical presence in the state.

Background

Technically, the issue before the Supreme Court in Wayfair was the constitutionality of South Dakota’s sales tax collection law. Under that law, only remote sellers with at least $100,000 in sales to South Dakota customers or 200 or more sales transactions to South Dakota customers in a year are required to collect tax. The law prohibits retroactive liability. In addition, South Dakota is a member of the Streamlined Sales and Use Tax Agreement, which is an agreement among 24 states to provide simplified and uniform methods to collect sales tax.

The Supreme Court held that physical presence is no longer required before a state can force a remote seller to collect its tax. However, the court also said that states cannot require a remote seller to collect their tax unless the seller has “substantial nexus” with the state and the tax collection does not place “undue burdens” on the remote seller.

While the court did not define “substantial nexus” or “undue burdens,” it said the threshold of $100,000 in sales or 200 in transactions was sufficient to establish “substantial nexus” in South Dakota and was sufficient protection for small sellers. The court did not say if smaller thresholds would be sufficient, or if $100,000 in sales or 200 in transactions would be a sufficient threshold in a more populous state like California or New York.

The court also was satisfied that collecting and remitting tax under the simplifications offered by the SSUTA would not constitute an undue burden on remote sellers, and cited with approval the fact that South Dakota’s law prohibited retroactive liability. However, the court did not say if collecting tax for states that are not members of the SSUTA would constitute an “undue burden” or if states could seek retroactive liability.

Thus, while Wayfair eliminated the physical presence requirement, the court’s failure to provide bright-line rules leaves many questions unanswered. These questions include:

  1.  In which states will remote sellers be required to collect tax?
  2. When will remote sellers be required to begin collecting tax in each state?
  3. Is there an efficient way for sellers to register and collect tax in states where they are required and/or choose to do so?
  4. Will remote sellers that sell via a marketplace face different tax collection obligations than sellers that do not sell via a marketplace?
  5. Will any states seek retroactive liability for periods prior to the Wayfair decision?
  6. Is Congress now likely to enact federal legislation to address this issue?

In which states will remote sellers be required to collect tax?

The elimination of the physical presence requirement likely opens the door for all states that impose a sales tax to eventually require remote sellers to collect their tax. However, to require collection a state must have a statute on its books that imposes tax collection obligations on remote sellers. Many states currently have tax collection statutes of various forms on their books, while some do not.

Of the states with statutes requiring collection by remote sellers, there are myriad threshold requirements. Some states have adopted the $100,000 in sales/200 transactions threshold that the Supreme Court blessed in Wayfair, others have higher or lower thresholds, and some have no dollar or number of transaction thresholds at all.

Some states’ laws base collection obligations on other factors, such as having “economic presence” in the state, having a related entity physically present in the state, using a marketplace provider in the state, etc.

The lack of a bright-line rule in the Wayfair decision creates uncertainty as to whether state laws with lower thresholds than South Dakota, or laws that base collection obligations on other factors, will pass constitutional muster. This ambiguity is likely to result in further litigation.

Eleven states (Alabama, Colorado, Hawaii, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Vermont and Washington) have enacted legislation requiring remote sellers that do not collect tax to file an annual report with the state that discloses the names, addresses and other information pertaining to the remote seller’s customers in the state. Remote sellers that do not collect tax must also provide an annual 1099-type notice to customers in these states. It is not clear if, in the future, these states will permit remote sellers to file the notices in lieu of collecting tax, or if they will require all remote sellers to collect the tax in light of the Wayfair decision.

The states without statutes requiring collection by remote sellers would need to enact new laws before collection could begin. Since most state legislatures have concluded their 2018 sessions, it is unlikely that these states will enact new laws prior to 2019.

The chart compiled by Ernst & Young shows the status of each state’s collection statute.

When will remote sellers be required to begin collecting tax in each state?

The dates on which remote sellers must begin collecting tax vary by state. The Ernst & Young chart also shows the effective date of each state’s collection statute. Some of these effective dates pre-date the Supreme Court’s decision in Wayfair; however, most states have indicated they will not seek retroactive liability.

Litigation is pending in a few states that must be resolved before the state can require remote sellers to collect.

The revenue departments in many states are working to prepare guidance to remote sellers about commencing the registration and collection process in their states. NRF is working with the National Council of State Legislatures and other governmental organizations to provide a single source where remote sellers can ascertain each state’s collection requirements, including the date on which the state expects collection to commence.

Is there an efficient way for sellers to register and collect tax in states where they are required and/or choose to do so?

The Streamlined Sales Tax Project has an efficient means for sellers to register and collect tax for the 24 states that are members of the SSUTA (Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming). 

The SSTP website contains a plethora of helpful information, including the ability to simultaneously register for tax collection in each of the member states, each member state’s taxability matrix and rate-and-boundary database, and a link to the website for the taxing authority of all 50 states, among other resources.

The SSUTA states will pay for the software remote sellers need to collect and remit tax in their states. In addition, STTP has contracted with several Certified Service Providers who will provide tax collection services for remote sellers to collect in SSUTA member states, at no cost to the remote seller. Moreover, under the SSUTA, remote sellers are relieved of liability for any tax collection errors if they utilize a CSP. The CSPs also handle most tax audits from the member states.

Remote sellers may engage CSPs and other third-party tax collection companies to provide tax collection services in the states that are not members of the SSTA. However, the remote sellers must pay the fees for these services and do not receive the indemnification from liability that the SSUTA member states provide.

Will remote sellers who sell via a marketplace face different tax collection obligations than sellers that do not?

Nine states have enacted legislation that requires marketplace providers to collect tax on behalf of remote sellers selling via their marketplace: Alabama, Arizona, Connecticut, Iowa, Minnesota, New Jersey, Oklahoma, Pennsylvania and Washington. It is expected that more states may follow this model.

Most of these states do not give the remote seller the option to collect and remit the tax on its own behalf; they require the marketplace provider to collect and remit the tax. (New Jersey will permit the remote seller to collect and remit its own tax even if using a marketplace provider.)  Thus, remote sellers selling both via a marketplace and directly to customers outside of a marketplace provider need to be aware of the special requirements in these states.

Will any states seek retroactive liability for periods prior to the Wayfair decision?

The Supreme Court’s opinion in Wayfair is ambiguous as to whether the elimination of the physical presence requirement can lead to retroactive liability for remote sellers. The fact that the court made favorable comments about the prohibition against retroactive liability in the South Dakota law seems to support an argument against assertions of retroactive liability by other states. In addition, many policy makers at both the federal and state levels have urged states not to seek retroactive liability. However, at this point, it is unclear if any states will pursue retroactive liability against remote sellers.

Is Congress now likely to enact federal legislation to address this issue?

On July 24, the House Judiciary Committee held a hearing on the implications of the Wayfair decision for consumers and small businesses. Although witnesses were asked whether there may be a need for federal legislation because of concerns that states might take inconsistent approaches to sales tax collection legislation, there appears to be no consensus for such legislation. In addition, there are very few legislative days remaining in the current session of Congress. It is more likely that states will act first and that Congress may take a role in the future if it is needed. Read the testimony of NRF’s witness.