A year ago, the Supreme Court upset decades of tax law with its Wayfair decision. The June 21 ruling overturned Quill, allowing states to collect sales taxes on purchases from retailers that have no physical presence in the state.
The decision led to dozens of new state laws (see the Tax Notes Nexus Tracker) and regulations, with more to come.
Tax Notes has put together a series of stories and analyses to mark the one-year anniversary and will be publishing them over the next two weeks.
The first examines the decision’s effect on the United States' sales tax environment.
A year after the Supreme Court's South Dakota v. Wayfair Inc. decision overturned the Quill physical presence standard, the sales tax environment in the United States has been irreversibly altered.
Most states with a sales or use tax require — or are moving to require — remote sellers to collect and remit taxes on their transactions. Creative physical presence standards, such as “cookie nexus,” have fallen by the wayside in favor of economic nexus — specifically, the value of sellers’ sales into a state, or the quantity.
Some things that seemed possible — that states might broadly seize upon Wayfair to pursue retroactive enforcement or that Congress would step in and pass national standards for remote sales tax compliance, for example — haven’t come to pass. Other predictions, that states would quickly follow South Dakota’s lead and would also seek to make marketplaces de facto tax collectors for small sellers, have been borne out.
Meanwhile, experts say that a year later other questions raised in the wake of the June 21, 2018, ruling remain unanswered while new ones have arisen.
The Aftermath
South Dakota’s law earned the praise of the Supreme Court justices, which as predicted at the time, helped push states to emulate that statute instead of reinventing the wheel, steering the response to Wayfair in a somewhat uniform direction.
“I never thought the sky would fall, and it didn’t,” said Darien Shanske, a tax expert at University of California, Davis. “I’ve been happy at the speed with which states have been updating their statutes.”
Adam Thimmesch of the Nebraska College of Law said that despite predictions that overturning Quill would cause a "free-for-all, with states going after every dime," generally "we don't see states grasping for more" than South Dakota did with its law.
In particular, experts noted that most states have avoided pursuing retroactive enforcement. Although the Supreme Court justices implicitly endorsed the absence of a retroactive enforcement provision in South Dakota's law, the decision didn't necessarily close the door on other states pursuing it.
According to Valerie Dickerson of Deloitte Tax LLP, there “was a bit of fear about retroactivity,” but she said that generally speaking, “states overall have been realistic about ‘let’s get people to collect’” going forward, rather than chasing back taxes.
There are exceptions, however: Massachusetts has been involved in a fight over its efforts to apply Wayfair retroactively, back to when it passed its own remote seller law.
Meanwhile, although many states have adopted the South Dakota law’s economic nexus threshold of $100,000 in annual sales into the state or at least 200 individual transactions per year, there has been some variability.
California, for example, recently approved a law implementing a $500,000 sales threshold and omitting a reference to a transaction threshold. The law replaces the $100,000/200-transaction threshold established via regulations in 2018.
Other states have also omitted the transaction threshold, and some have established that sellers need both a certain value and a certain volume of transactions to have economic nexus for sales tax purposes, rather than South Dakota’s either/or arrangement. While the inconsistency between states may present a challenge to sellers, experts say that such modifications of the South Dakota law's thresholds could protect states from potential legal challenges.
For example, a state “might take into account how onerous [its] compliance burdens are,” and set a higher threshold to ensure only larger sellers will be required to collect, according to Richard Pomp of the University of Connecticut. And eliminating transaction volume thresholds helps states protect against imposing collection obligations on small sellers with numerous low-value sales, according to Walter Hellerstein, a law professor at the University of Georgia and a sales tax expert.
Marketplace Facilitator Provisions
The rush by many states in 2019 to require marketplace facilitators to collect and remit taxes on third parties’ sales didn’t surprise experts, given that states had pursued such collections under laws requiring marketplaces to either report information about sales through their platforms or voluntarily remit the sales tax due, as upheld in Direct Marketing Assn. v. Brohl.
However, Andy Yates of Alston & Bird LLP said that before Wayfair, “there was some doubt as to whether there was enough nexus” to justify requiring marketplaces to collect tax on their sellers’ sales. That doubt “disappeared after Wayfair came along,” he added.
While marketplaces have fought efforts to require them to collect for third parties in the past, sources said entities like Amazon and eBay have cooperated with legislators to provide input on recent marketplace collection laws, and they appear to intend to comply with them. Amazon in particular has advised legislators that it believes marketplace laws are necessary to authorize it to collect tax on its sellers’ sales.
“At the end of the day, since Amazon is going to have to collect and remit taxes on its own sales, it may not put up much of a fight,” said Rachel Simon of Rutan & Tucker LLP.
Using marketplaces as tax collectors is considered a reasonable approach by many, since it removes the burden of complying with numerous state and local tax regimes from small sellers, instead tasking that to more sophisticated platforms that already track sales information. But there are still unresolved issues with marketplace laws.
“There’s enough cross-state variation that the compliance on a multistate basis” will be challenging, Yates said. “Some of the definitions [of facilitators] are very broad, and there are others that are more narrow. You could have a situation where one [entity] . . . is a marketplace facilitator in one state but isn’t in another.”
Nevada lawmakers enacted a bill June 3 that would also place some responsibility on referrers. The bill has not yet been signed into law.
David Gamage, a tax law expert at Indiana University, said that states may need to tweak the definitions for marketplaces and referrers to avoid being too broad, but also not narrow enough that a marketplace can opt to slightly adjust its business model to avoid the obligation to collect and remit tax.
Steve Wlodychak with EY warned that marketplace statutes also have technical issues that need to be worked out. For example, “they need to figure out the mechanical aspects to ensure” that taxes aren't applied “twice on the same sale,” he said. “I don’t know if that’s going to be by certificates — like resale certificates.”
Other questions that need to be answered, Dickerson said, include which party would get the refund if a seller and a marketplace both collect on the same sales by mistake.
“The good news is the states are aware and trying to work on it,” Wlodychak said. “The [Multistate Tax Commission] has had a bunch of hearings.”
Sellers
Wayfair's impact on remote sellers has varied, but the broad consensus is that although many are struggling with the transition, there is progress toward compliance.
“I haven’t seen a large outcry or political movement where people have been able to put their fingers on a great number of small businesses that are having to close up shop or stop selling online,” Thimmesch said.
Gamage noted that "we're so far not seeing massive reorganizations of businesses" seeking to avoid taxes.
But several sources — particularly attorneys representing business clients — noted that it's still relatively early in the process. Also, many sellers have had a hard time playing catch-up, trying to learn states' varying definitions and codes, getting set up to track sales, and figuring out how to ensure they know when they meet in-state thresholds, among other challenges.
“I think [the Wayfair majority] completely underestimated just how much of a burden it is,” particularly for midsize sellers that don’t make all — or any — of their sales via online marketplaces, Simon said.
Despite Wayfair’s publicity, Yates said some sellers were caught off guard by new state requirements and timelines for implementation. One "fairly sophisticated" seller was able to begin complying in January, he said, but even that “put them a couple of months behind” some states’ deadlines. He said some other sellers have run out of amnesty periods and may face penalties.
However, Yates added, “I think [compliance] is an initial cost burden” and that sellers will ultimately succeed in adapting.
Notably, some remote seller laws are structured to provide limited liability relief to sellers for “good faith errors” in compliance, as well as protection — particularly for marketplaces — from lawsuits for overcollection. However, Dickerson said the latter provisions may not provide as much protection for sellers as intended.
The Wayfair decision has also created an opportunity for some remote sellers that may have had sales tax liability before the decision to ask for a clean slate. For example, Pomp said, in cases where a seller may have had cookie nexus before the Wayfair decision — which might be difficult for a state to enforce but could still present a potential liability — a company’s representation may reach out to the state for assurance that registering to collect in the state under the new remote seller laws won't result in the state pursuing back taxes for pre-Wayfair sales under its previous rules.
“Some are contacting the states and saying ‘look, we have this potential problem, and we’d like to clean up the arrears,'” according to Pomp.
Challenges Ahead
One possibility raised by experts when the Wayfair decision was released was that Congress might face pressure from sellers to act. But there still hasn't been much progress on federal legislation to establish national rules for simplifying and streamlining remote sales tax compliance in the post-Wayfair world. One bill — H.R. 1933, the Online Sales Simplicity and Small Business Relief Act of 2019 — has generated some interest, including from marketplaces like eBay and Etsy, but its prospects aren't clear.
“The odds the federal government will do something seems substantially less” in the near term than they did last June, according to Gamage.
Another thought was that just as states might rush to test the limits of their new authority under Wayfair, sellers could also test the decision’s reach by filing preemptive litigation challenging new remote sales tax laws. But experts say there’s been no major, concerted push.
At this point “I don’t necessarily envision any mass litigation trying to challenge” the new remote seller laws, Simon said.
Yates said that the possibility of sellers pursuing litigation might have been partly headed off in the immediate term by states’ relatively uniform response to Wayfair. “States didn’t press retroactivity. . . . [and] sort of fell in line with the details of the decision, and by doing that they limited the opportunities for taxpayers to litigate,” he said.
However, as more states begin enforcing their rules and sellers find themselves increasingly targeted by state tax collectors and auditors, there may be more support for congressional action and greater incentives for sellers to challenge states’ rules in court. In particular, states that are not members of the Streamlined Sales and Use Tax Agreement may be vulnerable to challenges that their state and local codes are unduly complex and conflicting.
States could try to address that issue, however. Arizona, for example, recently passed legislation establishing that state retail classifications presumptively supersede local ones. But experts said more work needs to be done.
“There’s definitely issues remaining on the interaction of local sales and use tax regimes and state-level regimes,” Gamage said.
Sources also noted that complex sales tax codes create potential avenues for sellers to challenge remote seller laws on a case-by-case basis via so-called Pike balancing — a commerce clause test that weighs a requirement's burden on interstate commerce against the local benefits of the requirement.
Colorado in particular “still hasn’t quite figured out how to deal with its home-rule jurisdiction,” Yates said. “Their tax system still presents a potentially burdensome system.”
Pomp said in-state sellers could potentially also challenge states that create special rules for remote sellers that are designed to simplify compliance, while in-state sellers have to comply with more complex tax codes.
Sellers could also challenge remote seller laws via the due process clause, sources said. For example, sellers could argue that they didn't “purposefully avail” themselves of a state's market by making sales if they merely made sales via an online listing service or marketplace. However, experts said that could be a tough fight for sellers to win.
SSUTA Membership
Although the SSUTA was created in part to help states push for the authority to impose sales and use tax collection requirements on remote sellers, the Wayfair decision's overturning of the physical presence standard doesn't negate the importance of the agreement, sources said.
However, Simon noted, "perhaps we're not going to see as much additional streamlining as was anticipated" in the wake of the decision. “My recollection is that about half of the states are active members of the SSUTA, and I don’t think that number has materially changed.”
Still, experts said the SSUTA provides well-vetted definitions and uniform policies states can adopt. “A state doesn’t necessarily have to join the SSUTA to benefit from all the work it’s done,” Shanske said.
Lingering Concerns
One question raised by Wayfair is how well states will be able to fare in pursuing compliance from foreign sellers. Although they can technically mandate non-U.S. sellers collect on their sales, there’s no “full faith and credit clause” for enforcing the rule abroad.
However, Pomp said that fear has somewhat “fizzled out” in part because the adoption of marketplace facilitator laws has helped ensure that many foreign sales made to U.S. customers are taxed. And while independent foreign sellers may not comply, there’s pressure on larger foreign sellers, who will likely want to avoid racking up delinquent sales tax liabilities.
“Any vendor may confront the day when a buyer is interested in acquiring it, or it needs to borrow money from a lender,” Pomp said. Such a transaction would be hobbled if a company with a multinational presence had a large, unaddressed balance of back taxes due in multiple U.S. states.
Another ongoing issue for states is how to address pre-Wayfair statutes designed to secure sales tax compliance from retailers through broad definitions of physical presence, ranging from the relatively untested cookie nexus to the established concepts of affiliate nexus and “click-through” nexus.
Following remote seller laws, “the next wave is probably cleanup statutes,” according to Dickerson, who argued that a state's earlier rules combined with new remote seller laws can create confusion, with sellers trying to measure their presence under both the old laws and the new economic nexus thresholds.
“In some situations those [previous laws'] thresholds are as low as $10,000,” she said. “In the post-Wayfair environment it’s very easy to trip over having nexus.”
Some states have suspended their prior rules, such as Washington state and California, for example. Notably, the latter has a provision that allows it to reassert previous nexus standards if its remote seller rules are challenged and overturned.
Hellerstein said that if he were to give advice to lawmakers, it would be to keep open the option of imposing previous nexus standards. “But you don’t, from a policy standpoint, want people to be too confused,” he added.
According to Pomp, “there’s a very good reason to keep stuff on the books — there are back years that Wayfair doesn’t affect" and for which states may want to seek back taxes from sellers. "You also don’t know what the feds are going to do” longer term, he added.
Experts say that states’ new remote seller rules will also require statutory cleanup, including clarifying definitions. For example, “I have my own website and I sell on a platform — I sell $50,000 [worth of products] on my website, and $50,000 on the platform” into the same state, Pomp hypothesized. “Am I over the $100,000 [individual seller threshold]?” he asked.
Into the Future
While the Wayfair decision continues to pose some challenges, it also appears set to ease the advancement of some tax policy trends. For example, a bill introduced in Nevada would have imposed a tax on sales of digital goods, and cited the state's economic nexus threshold in order to assert authority to require sales tax compliance from remote digital goods sellers. The bill failed to advance by the end of the most recent legislative session but is likely to return in a future session.
The shift toward taxing digital goods is mainly a matter of state lawmakers deciding to tax digital products that are similar to tangible analogues — a video download versus a DVD, for example. But the ability to pursue remote sellers is essential to tax such transactions, and after Wayfair “we now have recognized physical presence isn’t necessary for enforcing a tax collection obligation,” according to Hellerstein. “Virtual presence is OK.”
Acclimatizing people to paying taxes for online transactions for tangible products post-Wayfair could also make it politically easier to get digital goods taxes approved. “I think there’s something to that,” Shanske said. “It also makes sense to have the same rule for both.”
Experts also note that the prediction that Wayfair would bolster arguments for adopting a single, economic presence standard for business taxes has received a boost.
Hawaii lawmakers approved legislation earlier this year to use their threshold for remote sales tax compliance to establish the obligation to pay corporate income tax. Washington state enacted similar legislation for its gross receipts tax.
“There were moves in this direction anyway, [but] I think Wayfair has and will accelerate these moves,” Gamage said.
State courts had already upheld states’ practice of using economic nexus for purposes of requiring business activity tax compliance, but sources said states may see Wayfair as an invitation to simplify their tax code and use a common standard for sales and business tax nexus.
“I think we’re going to end up with the same standard over time,” Yates said. “From the states’ perspective I would see why they would take the position that there’s no constitutional difference for sales tax and factor presence nexus.”
One complication for states with income taxes is P.L. 86-272, which prohibits income taxes from being applied to sellers of tangible goods who do nothing more than solicit sales within a state. But experts say that law may increasingly not apply to many sellers, given evolving business models in the new online economy.
“Its scope is likely to be limited more and more, reflecting its age,” Shanske said of the law. “The business has to be only engaged in selling tangible personal property, and only mere solicitation. In the modern economy, that’s very hard to do.”