Happy birthday, Wayfair: What a year it’s been
- Sales and Use Tax
- Jun 21, 2019 | Gail Cole
One year ago today, on June 21, 2018, the Supreme Court of the United States turned decades-old precedent on its head with its ruling in South Dakota v. Wayfair, Inc. Prior to this, a state could only require businesses with a physical presence in the state to collect and remit sales tax. Therefore, states lacked the authority to impose a sales tax collection obligation on countless online businesses making sales into the state. The Wayfair decision overruled the physical presence rule, thus enabling states to now tax remote sales, too.
What a year it’s been.
For the most part, states have spent the last 12 months coming to terms with their newfound authority to base a sales tax collection obligation solely on a remote seller’s economic activity in the state, or economic nexus.
A few states had South Dakota–style economic nexus laws on the books before June 21, 2018, but were unable to enforce them. One year later, only three of the 45 states with a general sales tax do not have an economic nexus law — Florida, Kansas, and Missouri — and remote sales tax revenue is flowing into state coffers from coast to coast.
As states crafted their laws, many looked to South Dakota’s model for guidance. The Supreme Court didn’t establish a bright-line test in Wayfair, as it did in the past with the physical presence rule. However, it did highlight three aspects of South Dakota’s tax system which, it said, “appeared designed to prevent discrimination against or undue burdens upon interstate commerce.” These are:
- Safe harbor for small sellers: South Dakota imposes a sales tax collection obligation on remote sellers only if they have more than $100,000 in sales or at least 200 transactions in the state in the current or previous calendar year.
- Prospective enforcement: South Dakota is prohibited from applying economic nexus retroactively.
- Membership in the Streamlined Sales and Use Tax Agreement, or SST: Like all 24 SST member states, South Dakota has standardized taxes to reduce administrative and compliance costs for sellers.
It’s no coincidence that of the more than 40 states with economic nexus, more than half (plus the District of Columbia) have adopted the same $100,000 sales/200 transactions threshold. States aren’t enforcing economic nexus retroactively, with the possible exception of New York: It announced rather cryptically in January 2019 that the Wayfair decision of June 21, 2018, allowed it to enforce existing provisions of the law “immediately.” And although membership in SST hasn’t grown, Pennsylvania is one of several states finding creative ways to reduce administrative and compliance costs for sellers.
There are growing pains, of course, as states enact new laws and figure out how to best enforce them.
Several states have already tweaked their economic nexus laws in one way or another. For example, California, Colorado, Georgia, Minnesota, North Dakota, and Washington changed the sales or transaction threshold associated with their small seller exception (all state economic nexus laws grant safe harbor to small sellers). California and Colorado have changed rules regarding local sales and use tax collection. Texas came up with a plan to allow remote sellers to collect a single local use tax rate in the state, so they won’t have to deal with the 1,500+ local rates.
Furthermore, more than 30 states, and counting, have decided that it would be most efficient for large marketplace facilitators or providers to collect sales and use tax on behalf of their third-party sellers. This helps ensure tax is collected on all marketplace sales, even those by remote sellers with sales below the economic nexus small seller threshold. Such laws are changing the rules of the game for many marketplace sellers as well as the marketplaces they sell through.
Businesses say, “Enough.”
States aren’t the only entities scrambling to adjust to the post-Wayfair world: The decision has impacted innumerable businesses. Once able to avoid sales tax collection in states where they had no physical presence, they’re now required to monitor their sales and/or transactions in all states where they sell (except Florida, Kansas, and Missouri, as well as the five states with no general sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon).
It’s not easy. Although more than 20 states use the $100,000 sales/200 transactions threshold, the sales that comprise the threshold vary from state to state. Some states include electronically transferred products, for example; some include services and/or exempt sales. Finding that information isn’t always easy.
Changing rules and laws don’t help, especially when states provide little notice. The significant changes California made to its economic nexus rule were enacted more than three weeks after the rule initially took effect. Vermont enacted a law on June 4, 2019, that required marketplaces to collect and remit on behalf of sellers starting June 1, 2019.
And there’s at least one business out there that’s decided to forego sales rather than deal with sales and use tax collection in Colorado, which has one of the most complex local tax systems in the nation. A home rule state, Colorado allows local governments to establish and administer local sales and use tax rates, rules, and regulations. Thus, they can adopt local economic nexus and require certain remote sellers to collect and remit local taxes to the districts.
It’s no wonder a Wisconsin-based online store refused to make a sale to a Colorado resident who happens to specialize in sales tax (hat tip to Bloomberg Tax). The customer was told his order was rejected because the shipping address is located in a tax jurisdiction that requires sales tax to be remitted to both state and local tax authorities. The company says it does “not have the capacity to file city tax returns in hundreds of individual localities where we have no physical presence.”
According to the thwarted customer, the company has made a mistake: His hometown doesn’t require remote sellers to collect and remit sales tax. But one could argue that at least the business erred on the side of caution, deciding to not make a sale rather than potentially run afoul of a local tax authority.
How many other companies are taking a similar position?
Carrots vs. sticks
Colorado is an extreme case, to be sure; but even in other states, there’s real complexity surrounding economic nexus laws. Perhaps that’s why states seem to be going easy on non-compliant sellers. For now.
Bloomberg Tax noted recently that “states have been treading softly since the U.S. Supreme Court’s Wayfair ruling.” They’re encouraging compliance with their new economic nexus laws with carrots, rather than forcing it with sticks like audits, assessments, penalties, and so forth. In other words, they don’t appear to be cracking down on non-compliant businesses.
According to Verenda Smith of the Federation of Tax Administrators, enforcement is on hold while states get “their laws and guidance in place.” And Joseph Bishop-Henchman of the Tax Foundation believes the tricky state of Colorado, at least, “will hold off on penalties until they get things sorted out as far as collection is concerned.” (Hat tip to Bloomberg Tax, again.)
That will change, eventually. States have been actively seeking non-compliant remote sellers for months, if not longer, and they’re not looking just for fun.
Lessons learned in the past year
The Wayfair ruling doesn’t give states carte blanche to go tax happy: It is paramount that states avoid placing undue burden on interstate commerce. If state economic nexus laws become too burdensome for businesses, those laws could be challenged (not all businesses will opt to forego sales like the Wisconsin-based business described above). And as Wayfair revealed, precedent can be overturned.
Unless or until it is, however, states will continue to pursue remote sales tax revenue the best way they can. Businesses should plan accordingly and confront this issue head-on.
Avalara can help. We’re an SST Certified Service Provider, able to provide free tax services to qualifying sellers in 24 states, plus Pennsylvania. We already help thousands of customers comply with sales and use tax laws around the country, and with transaction tax laws around the world. Learn more.