Last year’s US Supreme Court ruling in South Dakota v Wayfair was the most significant development in state and local taxation in decades – with implications reaching across state lines. In its decision, the Court provided that states can impose sales tax requirements on remote sellers so long as those requirements do not represent an undue burden on interstate commerce. The Court, though, did not provide much guidance regarding the extent of economic connections a seller must have with a state to justify a tax collection requirement. Nevertheless, more than 40 states have since passed variations of the South Dakota law (200 transactions or $100,000 of sales) or started enforcing existing economic nexus rules already on their books. However, despite the Court’s prying open the tax floodgates, these statutes continue to be a work in progress.
So far, states have been slow to enforce their economic nexus sales tax laws. Many state provisions included enforcement dates months into the future or grace period until enactment went into effect. While most of these enforcement dates have come to pass, numerous states are still campaigning to encourage remote sellers to register and become compliant with the regulations – instead of engaging in sweeping tax examinations. To further urge compliance, several states have recently partnered with certified sales tax service companies to provide filing compliance for remote sellers at reduced costs, thereby delaying these states from auditing potentially noncompliant vendors. How much longer states will hold off their audit groups remains to be seen. In all likelihood – due to the steps states are taking to get the word out regarding registering – the audit notices will be mailed sooner rather than later.
In gaining an understanding of the widespread net that Wayfair casts, states now realize that from a policy and collection perspective, it is much easier to collect sales tax from a few marketplace facilitators, such as Amazon and eBay, than from numerous out-of-state sellers. Laws shifting the compliance onus to collect and remit tax from third-party sellers to marketplaces result in less revenue leakage and minimal enforcement procedures. As a result, states are rushing to update their new Wayfair laws to include marketplace facilitator clauses, though the majority of these regulations will not become effective until later in the year.
Issues on the Horizon
- A growing number of states are forgoing or dropping the sales volume thresholds (i.e., 200 transactions) and adopting thresholds solely linked to sales revenues. This may be problematic for those businesses that already registered as a sales tax vendor under the volume threshold premise but may not necessary meet the sales revenue benchmarks. Can such sellers unregister or are they locked into the state’s compliance requirements?
- Not all states view their threshold factors in the same way. The inclusion or exclusion of exempt sales, sales for resale and marketplace sales vary on a state-by-state basis. What about a vendor that sells both through a marketplace and has its own direct sales? Sales volume thresholds are likewise challenging. Are transactions counted on an invoice by invoice basis or item by item?
- Some states are still searching for the threshold “sweet spot” that will result in maximum tax revenues at minimal administrative burden. For example, Oklahoma raised its threshold from $10,000 to $100,000, a figure more in line with South Dakota’s benchmark. Georgia has indicated that next year it too will increase its threshold, to $250,000, up from $100,000. Are remote sellers who began complying with the rules under the old threshold required to continue collecting and remitting sales tax if they do not meet the new thresholds? Will other states consider changing their thresholds as well to reduce compliance burdens?
- Certain states are facing lawsuits on their economic nexus laws, because their enforcement dates pre-date the Wayfair decision. Questions remain as to if, or whether, such states will pursue collection activities for the time periods preceding June 21, 2018, the date of the Supreme Court’s decision.
- States like Colorado and Louisiana have complex local sales tax laws which may raise concerns regarding undue burdens on remote sellers. If a state’s rules are too cumbersome, they can be deemed to conflict with the Wayfair decision’s presumption that sales tax rules are not overly difficult to comply with, and therefore could be found unconstitutional. Accordingly, taxing authorities are reassessing their tax statutes to ensure that they, at the very least, mirror the South Dakota law the Supreme Court reviewed.
- Enforcing Wayfair statutes against foreign sellers could be a challenging endeavor. While foreign sellers with no permanent US establishment and operating under a tax treaty are generally exempt from US tax obligations, such protections only extend to federal income taxes. Therefore, foreign vendors meeting the requisite thresholds are obligated to comply, but state laws as currently drafted allow for little leverage to compel observance of the tax responsibility. This likely puts domestic businesses at a competitive disadvantage, which is the very issue - albeit from an in-state versus out-of-state perspective - that Wayfair-inspired laws seek to eliminate.
- Wayfair laws are likely to have broad implications in the merger and acquisition scene. Due diligence and tax clearance certificates will become more important as sellers begin to have tax nexus in many more jurisdictions, opening the door to greater tax exposure and added risks for responsible persons.
Undoubtedly, Wayfair laws will have a significant impact on states and sellers alike as their full scope unfolds. If you have questions regarding the effect of the Wayfair decision on your business, please contact Alan Goldenberg, Principal State and Local Taxation and Tax Controversy, at 212-897-6421 or via email at email@example.com, or your Friedman tax advisor.