A year after the U.S. Supreme Court decided South Dakota v. Wayfair Inc., state tax experts are starting to zero in on the Court’s reference to and reshaping of the concept of “undue burden.”
“The most confusing aspect of Wayfair is the majority’s ambivalent, vague suggestion that state tax jurisdiction can also be evaluated utilizing the dormant Commerce Clause principle of ‘undue burden,’” Michael Fatale, deputy general counsel for the Massachusetts Department of Revenue, wrote in a Chapman Law Review article that the Multistate Tax Commission has posted online with permission.
In the article and at the Northeastern States Tax Officials Association’s annual meeting in Providence, Rhode Island, Fatale said the Wayfair Court’s reference to the undue burden standard “seems intended to encourage states to simplify their state and local use tax collection systems as they apply to out-of-state vendors — particularly small vendors.” And yet the reference risks creating confusion and unnecessary litigation, he said.
“Ironically, the notion of transposing the undue burden concept to the state tax context traces entirely to the analysis in Quill that Wayfair otherwise rejected,” Fatale wrote. “Further, because the undue burden test has never been actually applied to state tax cases, it is not apparent how it could apply.”
Speakers on different panels September 10 and 11 raised the issue of the Wayfair Court’s reference to undue burden.
Cookie Nexus Challenge
Fatale described the interplay of the Wayfair Court’s approach to undue burden and Crutchfield Corp.’s legal challenge to the Massachusetts cookie nexus regulation (830 CMR 64H.1.7) that took effect October 1, 2017.
The regulation’s cookie nexus concept is tied to a remote seller’s property interest in the in-state software, apps, or cookies that enable e-commerce transactions in Massachusetts. It requires internet sellers with cookie nexus to collect and remit tax when in the prior year they had more than $500,000 in sales and 100 or more transactions in the state.
“One very big vendor complied within the very first week,” Fatale said at NESTOA. He added that during the eight months between when the reg took effect and the Wayfair decision came out, remote sellers with cookie nexus collected and remitted about $20 million in Massachusetts tax.
Crutchfield Corp. initiated its suit challenging the Massachusetts reg in a Virginia court in October 2017. The company did so under a 2004 Virginia statute (Va. Code. Ann. Section 8.01-184.1) that says Virginia circuit courts have original jurisdiction over declaratory judgment actions when another state asserts sales and use tax nexus over a Virginia business. The law specifically says an in-state company can sue another state “for declaratory relief on the issue of whether the requirement of another state . . . constitutes an undue burden on interstate commerce within the meaning of [the commerce clause].”
As an aside, Fatale said Virginia is one of three states with such statutes; he said Texas and Iowa are the other two, and that the laws are based on model statutory language developed by the American Legislative Exchange Council. Massachusetts was the first state to be sued under one of these statutes, and Fatale said the DOR and many state revenue officials nationwide were unaware the statutes existed.
“It’s kind of an interesting thing, because undue burden — before the Wayfair case came down — didn’t have any specific meaning equated to the idea of physical presence generally,” Fatale said. And yet, he said, the logical claim that a retailer would have brought under such statutes pre-Wayfair would have challenged the Massachusetts cookie nexus concept as an undue burden in relation to the constitutional physical presence standard.
Then the Wayfair decision came down in June 2018. Undue burden now seems to be tied to whether an out-of-state company has the resources to comply with what might be potentially complicated state tax rules, Fatale said. That new concept of undue burden has implications for Crutchfield’s cookie nexus challenge. "Now the claim in this case is different, actually, than it once was, somewhat interestingly,” Fatale said.
The DOR has taken the position that Massachusetts can’t be hauled into Virginia court as a matter of personal jurisdiction — that there aren’t sufficient contacts either under the Virginia statute or as matter of constitutional law. Also, Fatale argued that the Virginia statute requires that a state must have asserted a use tax collection duty against a company. He argued that sending a few letters to Virginia companies saying that the Massachusetts regulation had come out and that they might be subject to it isn’t necessarily the assertion of a collection obligation; he called such letters advisory.
If the DOR fails on a personal jurisdiction argument, Fatale said Massachusetts might be able to claim under the U.S. Supreme Court’s decision in California Franchise Tax Board v. Hyatt that a state can’t be sued in another state’s courts. He added that counsel for Crutchfield appears to believe that Hyatt is limited to situations in which a state is being sued for actions involving torts.
Were the Massachusetts DOR to also fail on the state sovereignty issue, then perhaps it could prevail on Crutchfield’s undue burden claim, which Fatale said is simply whether a fairly large company can claim it would be an undue burden to comply with a state’s sales tax law that arguably is not that complicated. He said Massachusetts, unlike other states, doesn’t have localities that impose sales tax, for example.
In the meantime, Massachusetts has adopted Wayfair-type economic nexus thresholds for sales and use tax purposes that take effect October 1.
Kansas Controversy
Craig Johnson, executive director of the Streamlined Sales Tax Governing Board, was sitting in the audience during a different session and was asked to address why no state has joined the Streamlined Sales and Use Tax Agreement since Wayfair came down. Johnson said he believes the main reason is because the decision’s language doesn’t actually require states to do so.
Johnson said states are adhering to two — but not all three — aspects of the South Dakota law that the Court’s majority supported: its lack of retroactive enforcement provisions and its establishment of economic nexus thresholds. The third aspect is SSUTA membership.
“Kansas did two out of three as well,” Johnson said. Kansas, a SSUTA member, is not retroactively applying economic nexus.
But Johnson noted that there has been an uproar over the Kansas Department of Revenue’s August notice saying it will require remote sellers to collect and remit tax on sales into the state starting October 1 while providing no South Dakota-type thresholds or other small-seller exception.
“We have to recognize that the issue of undue burden has not been decided,” Johnson said. “We know that there are organizations, associations that are looking for a challenge to Wayfair and are looking at it from an undue burden perspective. Where that challenge will come from, we don’t know.”
Johnson said SSUTA states believe they’re in a good position should they face an undue burden claim. He challenged officials from states that are not members “to think about what you have done to remove the undue burden, recognizing that has not yet been settled.”
During another panel, Richard Cram, director of the Multistate Tax Commission’s National Nexus Program, echoed some of Johnson’s comments. Cram reminded the audience that the Supreme Court remanded the Wayfair case to a lower court to determine whether South Dakota’s law was unduly burdensome or discriminatory against interstate commerce; the case was ultimately settled.
“We don’t really have a U.S. Supreme Court determination of whether the South Dakota law is constitutional or not,” Cram said.
Back in Kansas, Attorney General Derek Schmidt (R) said in an August 28 statement that he has received two requests for a formal legal opinion on the DOR’s position. “We will work diligently to issue a formal opinion before the new policy takes effect October 1 so all involved may see our legal analysis in deciding how to proceed,” Schmidt said.
“I can speculate how that’s going to come down,” Cram said, noting that Kansas has a Democratic administration and a conservative Republican attorney general. He predicted that Kansas next year will enact South Dakota-type economic nexus thresholds like those vetoed by Gov. Laura Kelly (D) for reasons unrelated to the provisions.