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Scott Peterson on Marketplaces, Kansas Controversy, Gig Economy

Posted on Nov. 25, 2019

Scott Peterson, the first executive director of the Streamlined Sales Tax Governing Board, has an unexpected take on the marketplace facilitator language developed in the months after Wayfair and widely adopted by states in 2019.

“There’s hardly anything the states have done right on that, other than they got the timing right,” said Peterson, now with Avalara, one of the software companies certified under the Streamlined Sales and Use Tax Agreement to perform all of a remote seller’s sales and use tax compliance functions.

Scott Peterson of Avalara. (Photo by Paige Jones)
Scott Peterson of Avalara. (Photo by Paige Jones)

In a podcast interview with Tax Notes on how remote sellers are coping nearly 18 months after the U.S. Supreme Court decided South Dakota v. Wayfair Inc., Peterson — who spent a decade as South Dakota’s sales tax director — opened by discussing what the state got right and wrong in its law that ultimately became the legal challenge to Quill Corp. v. North Dakota’s physical presence test.

He weighed in on the controversy in Kansas, where the Department of Revenue — over the objections of the state Office of the Attorney General — is enforcing sales and use tax obligations on remote sellers even though the state has not enacted economic nexus thresholds. “The challenge, I think for both of them, is they're both right,” Peterson said of the competing legal arguments put forward by the Kansas agencies.

Peterson discussed his thoughts on why no state has joined SSUTA since the Wayfair decision came down. He had much to say about the latest round of national initiatives on marketplace facilitators, and he said that discussions about whether Wayfair has implications for corporate income tax and for P.L. 86-272 purposes are legitimate.

Peterson also touched on emerging trends, including state tax developments in the gig economy, movement among the states toward taxing more services, and how conversations about France’s digital tax are stymied because the word "digital" has a different meaning in Europe than it does in the United States.

South Dakota’s Law

In 2016 the National Conference of State Legislatures’ Task Force on State and Local Taxation recommended that states adopt model statutory language that it had developed providing for an expedited legal challenge to Quill. That model also contained language regarding nexus for remote sellers and regarding imposing collection requirements on marketplace facilitators.

Former South Dakota state Sen. Deb Peters, then a member of the NCSL task force and a former governing board president, largely used that model law as the basis for her measure that ultimately went to the U.S. Supreme Court. Several states quickly followed. Peterson said he never imagined the speed with which so many states could adopt almost the same model law. “It's truly remarkable. This happened just — bam!” he said. 

“What the states got right with this concept was timing,” Peterson said. “They read the Supreme Court correctly.” Justice Anthony M. Kennedy had just called for a challenge to Quill’s physical presence test, which electrified state tax policymakers. “They understood that their response had to be simple,” Peterson said.

But Peterson said many policymakers initially were not impressed that South Dakota had taken the lead in bringing the national challenge. “’South Dakota? Horrible law,’” he said, describing the attitude at that time. “’What are you trying to do? You've got no facts. You're not building a case. We'll never be able to appeal this thing because you've got no facts.’”

“Now they're just crazy happy that it was South Dakota,” Peterson added. Because the state has no corporate or personal income tax, South Dakota is almost solely dependent on its sales tax. “They tax everything,” he said. The state’s local sales and use tax structure also is somewhat complicated, extending to 250 cities and seven tribal governments.  

Later, when lawmakers in other states took a second look at the implications of South Dakota leading the challenge, they said, “‘Holy cow. We are simple compared to South Dakota and what they tax,’” according to Peterson. Whereas lawmakers in states where no local jurisdictions impose sales and use tax thought their states would have been better petitioning the Supreme Court, post-Wayfair they now think that maybe their own local governments should be imposing the taxes too, he said.

“What they got wrong was going into this thing not really sure they were going to win,” Peterson said of the states. South Dakota’s law is actually “painfully simple” — maybe too simple, he said. When Wayfair was issued, states weren’t prepared for the questions that would come up about the South Dakota law and others based largely on the NCSL task force model.

“The day the Court issued their opinion, I called my friends at the South Dakota Department of Revenue. Many of the people that worked for me when I was there still work there,” Peterson said. “And I asked them, ‘What's the definition of a transaction?’ and they couldn't answer the question. By then we'd already had like 10 or 11 states that had adopted exactly the same language. None of them could answer the simplest questions about what is really a very simple law.”

“They did that wrong," Peterson said, adding that "the last 15 months is what they’ve been playing catch-up on.” 

Marketplace Facilitators

In the months after Wayfair was decided, a work group of the Multistate Tax Commission developed a white paper recommending that states require marketplace facilitators to collect tax on third-party sales. Published in time for consideration during the 2019 legislative sessions, the MTC's 2018 white paper provided examples of statutory language for various marketplace facilitator provisions.

States again acted swiftly: Thirty-five now have marketplace facilitator laws on their books. 

“There's hardly anything the states have done right on that, other than they got the timing right,” Peterson reiterated. States had a “pretty good idea of the limited group of businesses that they wanted to impact . . . Almost nothing after that they've gotten right.”

“Some of that's not their fault,” Peterson said. Before Wayfair made it to the Supreme Court, a few states adopted laws requiring facilitators to either collect and remit tax or comply with notice and reporting rules. But the law that Minnesota adopted in 2017 “was completely different from the law that Washington adopted in 2018,” and while Pennsylvania enacted a version closer to Washington’s, it, too, was different, Peterson added.

Those first states were targeting the same group of online marketplaces and attempting to build a sales tax collection obligation for marketplaces facilitating third-party sales, Peterson said. But giving facilitators the option of not collecting sales and use tax “created just odd outcomes for marketplaces and for the states,” he said.

Then Wayfair gave states the ability to require collection by facilitators and eliminate the optional notice and reporting requirements. Yet, Peterson said, the same problems remain: States don't all define marketplaces the same way, and they aren’t uniform in other aspects of their laws. “They're all over the board, they all do little different things,” he added.

State lawmakers and tax officials also had no idea how many different types of marketplaces were out there, which leads to what Peterson said is the root cause of some of the biggest problems with the recently enacted facilitator laws: States designed their statutes based on Amazon.com Inc.’s online marketplace model.

“They all thought the whole point of this project for years has been, ‘How do we get Amazon to collect?’” Peterson said.

Amazon spent the first half of the decade terminating its associate programs in states that enacted click-through nexus laws, though by mid-2016 it had agreed to start collecting tax in all states with a sales and use tax. However, more than half of Amazon’s annual retail sales are made by third-party sellers over its marketplace, and while the company collects and remits tax on its own sales, it does not do so on third-party sales unless a state has enacted legislation putting the collection obligation on the marketplace facilitator.

States then focused on how to get Amazon to collect on third-party marketplace sales. The problem is that most online marketplaces are nothing like Amazon’s, Peterson said; most don’t do shipping and handling, and many are only partially involved in the financial transaction, if at all. The facilitator laws based on Amazon’s model don’t work well for most marketplaces, he said.  

Both the MTC's Wayfair implementation work group and the NCSL task force are developing a second round of white paper recommendations and draft model statutory language addressing marketplace facilitators. Peterson has been participating in both efforts.

Peterson said he is doing his best to persuade participants in the national initiatives to somehow package their recommendations. They need to “not have the department of revenue on one side doing something and the state legislature on the other side doing something entirely different, and both of them trying to do the same darn thing, which is frankly the history of sales tax,” Peterson said. 

During the 2020 sessions, Peterson said he expects that states will modify their Wayfair economic nexus and marketplace facilitator laws to make them more uniform. “They're finally getting [that] there's value to having uniformity,” he said. 

Specifically, Peterson said he expects states to narrow their definitions of marketplace facilitator, because lawmakers and revenue officials are realizing that the broader definitions are picking up too many types of businesses. The broader definitions are also creating an uncomfortable position for some revenue departments when it comes to in-state sellers, he said. For example, restaurants are using to-go services to deliver orders to customers in other local taxing jurisdictions that might tax meals differently than the jurisdiction in which the order was purchased. But the purchasing district — not the delivery district — is getting the sales tax on that order, even though the majority of states use destination sourcing for both in-state and out-of-state sales, Peterson said. Restaurant owners are wondering if they need to start collecting sales tax in every jurisdiction in which a delivery company drives its orders, he said, adding that lodging marketplaces will likely have the same issues.

The MTC’s 2019 white paper and the NCSL task force’s 2019 model statutory language will both attempt to provide definitional support for states that don't want their marketplace facilitator collection obligations applying to such business, Peterson said.

Kansas Controversy

Kansas is one of the few states that didn't enact Wayfair-type economic nexus thresholds this year; the governor vetoed bills containing those provisions for reasons unrelated to remote sellers. Even so, the Department of Revenue issued a notice in August saying it will enforce collection requirements on remote sellers effective October 1. 

Revenue Secretary Mark Burghart said the notice "did nothing more than publicize the Wayfair decision," describe how the state's long-standing statutory language authorizing it to require sales and use tax collection by remote sellers to the extent allowed under the U.S. Constitution now applies, and provide instructions for registering with the state. He said that when the Wayfair Court overturned Quill, there no longer was a constitutional impediment to Kansas enforcing the statutory requirements that it adopted in 2003.  

In a nonbinding opinion, Kansas Attorney General Derek Schmidt agreed that Wayfair did not expressly hold that a statutory safe harbor based on sales volume or transactions is required under the commerce clause before a state can require remote sellers to collect tax. But he disagreed that Kansas can enforce the 2003 law without enacting "a standard for determining which out-of-state retailers those are,” and noted that "what constitutes de minimis contacts has not been determined at this time.” 

The attorney general declared the DOR’s notice void, but the DOR is enforcing collection obligations — and the conflict is causing confusion for remote sellers.     

“I feel a little bit like Justice Alito in the Wayfair case,” Peterson said. “I read the attorney general's opinion and I think, ‘Well, that makes perfect sense.’ And I read the Department of Revenue's response, ‘Well, that makes perfect sense.’ Who do I believe?”

“The challenge, I think for both of them, is they're both right,” Peterson said. However, this leaves individual remote sellers wondering what to do and whether they should hire a lawyer to determine which side to believe, he said.

If matters go the DOR’s way and a remote seller is not collecting right now, Kansas revenue officials “might be understanding for a month or two months or maybe even six months, but a year from now they're not going to be understanding,” Peterson said. But if things go the attorney general’s way, then remote sellers that have been collecting in Kansas all this time are legally covered but will have put themselves at a competitive disadvantage.

Peterson noted that, like Kansas, several states years ago enacted laws containing language allowing them to enforce sales and use tax collection obligations on remote sellers doing business in their states to the furthest extent allowable under the Constitution. “I mean, all these statutes were adopted in the late 1980s and early 1990s when the states were trying to kill Bellas Hess,” he said. “They're all alike. And none of them have a small-seller exception in them.”

Last year, California, New York, and Wisconsin were among the states where revenue officials were considering doing exactly what the Kansas DOR is doing now, Peterson said. Those states had nearly identical long-standing statutory provisions authorizing enforcement but containing no South Dakota-type thresholds, and revenue officials were deciding whether they could adopt a small-seller exception by regulation, Peterson said.

Peterson added that in the fall of 2018, it wasn’t clear to him that those three states had statutory authority to create a small-seller exception. “You're creating one because you think that's necessary because the Supreme Court ruled on a state law that had one, and they commented that they liked the fact that South Dakota's law had one," he said.

For its part, the Kansas DOR determined that it does not have statutory authority to put in place a threshold amount. “A de minimis amount is viewed as the equivalent of an exemption from tax, and under the Kansas Constitution, only the Legislature can grant an exemption," a DOR spokesman told Tax Notes. This is how Kansas got into the situation in which the DOR is enforcing collection obligations under a 2003 statute but is not providing nexus thresholds or other small-seller exceptions.

Streamlined 

Craig Johnson, the current executive director of the Streamlined Sales Tax Governing Board, recently pointed out that many states are adhering to two — but not all three — aspects of the South Dakota law that the Wayfair Court’s majority supported: its lack of retroactive enforcement provisions, and its establishment of economic nexus thresholds. The third aspect is SSUTA membership, but not a single state has joined the agreement since Wayfair was decided. 

“Kansas did two out of three as well,” Johnson said, referring to its membership in SSUTA and to it prospectively imposing collection obligations. Yet Kansas is the only state whose enforcement is causing an uproar, he said. “We have to recognize that the issue of undue burden has not been decided,” Johnson said. He, too, argued that being a member of SSUTA significantly reduces or eliminates burdens on small sellers.

Johnson said he believes the main reason that no state has joined SSUTA since Wayfair is because the decision’s language doesn’t expressly require states to do so. Peterson had additional thoughts on the matter.

“I don't think the reasons are any different after Wayfair than they were pre-Wayfair,” Peterson said. “There are multiple reasons, and every state has their own reason. The primary one is they didn't see any benefit from it. And that hasn't changed any.”

One issue is that uniform definitions by their nature change what's taxable, Peterson said. So if a state doesn't already use a SSUTA definition, adopting it is going to change how that thing is taxed or whether it is exempt, “which means tax goes up, tax goes down, people are offended,” he said, adding that there’s no way to avoid upsetting people with such changes to a state’s tax structure.

SSUTA’s requirements regarding local governments also keeps some states from joining, Peterson said. Lawmakers in states like Alabama, Alaska, Arizona, Colorado, Louisiana, New Mexico, and Texas “never wanted to take on the fight,” he said, because of “the politics of looking at a mayor and saying, ‘I'm going to take away your authority because you're just too cumbersome. You're too hard on business.’"

“A couple of these other states, I think they just frankly don't care,” Peterson added.

For example, Tennessee, where Peterson now lives, also has no personal income tax and relies heavily on its sales tax. Tennessee used to allow out-of-state dealers to use a uniform 2.25 percent local sales and use tax rate option. But effective October 1, the DOR started enforcing new rules requiring out-of-state dealers with more than $500,000 in sales into the state to collect and remit tax at the rate imposed by the jurisdiction in which sales are delivered. Put another way, in addition to eliminating the simplified local rate, Tennessee is requiring out-of-state dealers to collect tax based on destination sourcing while in-state dealers continue to use origin sourcing.

Peterson said this means that an in-state dealer making sales all over Tennessee will collect at one local rate while out-of-state dealers making sales in exactly the same places must collect at every local rate. “Someone is going to get sued over that,” he said.

Of course, SSUTA’s uniform definitions — especially its definitions of digital goods, Peterson said — and its limitations on how local taxes are imposed are also key arguments for states to become members. But Peterson said the real benefit to small sellers of a state’s membership in SSUTA is the agreement’s certified service provider (CSP) program.

In Kansas earlier this fall, Burghart argued the same thing. He said he’s not particularly concerned about litigation over the state’s enforcement of remote seller collection obligations because its membership in SSUTA significantly reduces or eliminates burdens on small sellers — and he cited the ability of sellers to contract with CSPs through the agreement. He said burdens related to registration, tax calculation, return preparation and filing, and documentation on audits are substantially lifted from small sellers. “Kansas pays for each and every one of the compliance functions noted above,” Burghart said. “The seller pays nothing.”

Peterson echoed those sentiments. “Just the payment itself for the services is the thing that makes it really, really beneficial for small sellers,” he said.

The governing board, meanwhile, has drafted a model statute that would authorize a state that is not a SSUTA member to participate in its central registration system and in contracts with CSPs.  

Gig Economy

Uber and Lyft are platforms of a different type, but the gig economy is another area in which there are tens or hundreds of thousands of new entrepreneurs who need to collect tax.

Peterson said the first challenge for states attempting to tax the gig economy is determining whether they even tax the service provided. Take ride sharing, for example.

“It's one thing to have this conversation if you tax taxi services, but if you're a state that doesn't tax taxi services, it's an odd conversation,” Peterson said. “I don't know how you would impose a tax collection obligation on the gig economy when the gig is giving people rides in the car when you don't also make the same obligation on taxis.”

Another challenge is that much of the gig economy is service-based, and very few states tax services broadly. However, in relevant comments later when talking about emerging trends generally, Peterson said he expects more states to seriously consider expanding their taxation of services.

“I didn't expect to see North Carolina, Rhode Island, Kentucky, and Iowa in the last two years all have a very serious and mostly successful conversation about taxing services,” Peterson said. “Historically, that was like the [third] rail: You're a politician, you touch that and you're gone.” 

California’s recent enactment of a law reclassifying many workers as employees rather than independent contractors is driving much of the discussion about state taxation of the gig economy. 

“I can see why California and the states that rely a lot on income taxes would want this to happen,” Peterson said. There are services provided in the gig economy that aren't subject to sales tax but would be subject to withholding and all the other things that go along with income taxes, which are radically simpler for the state to have an employer collect than relying on independent contractors to accurately fill in their own personal income tax returns, he said.

But Peterson said reclassification would be a major issue for the many businesses that legitimately operate as independent contractors — truckers, for example. States that pass a law saying that every trucking company's drivers are employees will offend truckers who bought their truck while the trucking companies didn’t provide them anything other than a load to haul when the trucker wanted, he said.

Also, Peterson said a state without an income tax that broadly imposes its sales tax on services is better off having workers classified as independent contractors. For example, because South Dakota taxes so many services, Peterson said it is a better deal for the state when someone is an independent contractor, because that person is almost always doing something that is taxable and can be issued a sales tax license by the state.

France’s Digital Tax

“A lot of the press these days is talking about France and their digital tax,” Peterson said, referring to the nation’s 3 percent digital services tax that became law in July. He said he believes conversations about France’s digital services tax are stymied at the state level.

“It's frustrating because the word ‘digital’ means something different in Europe than it does here,” Peterson said. Americans think of downloads when they hear "digital," he said, whereas the French think of platforms — “they think of a way of making a sale and not the thing that gets sold.”

“In Avalara we have a big European division, and it took us two months — when we were talking about digital — just to define digital,” Peterson said. He added that he doesn’t think of France’s digital tax as a sales tax or a value added tax — “I think it's a corporate income tax thing.” France’s tax uses turnover instead of profit as a basis for taxation and is intended as a temporary remedy to the shortcomings of permanent establishment rules in the digital economy. 

Also, Peterson said he expects the conversation to be more nation-to-nation than affecting the states. The questions raised by France’s digital tax are going to include whether the parties have to redo their tax treaties to make it clear that it's permissible for France to tax the income of a U.S.-based company and vice versa, he said.

In the United States, Peterson called legitimate the discussions about whether Wayfair has implications for corporate income tax and P.L. 86-272 purposes. 

“Now that the states have the authority to do economic nexus for one tax, they're looking at making that apply to all their taxes,” Peterson said. He questioned the logic, however, of tying economic nexus thresholds for sales and use taxes to those for corporate income taxes because the taxes and what makes them complex are too different.

Peterson noted that economic nexus for corporate income tax purposes has been in effect in several states for a long time, and added that unlike with economic nexus for sales and use tax purposes, an out-of-state company might have economic nexus for corporate income tax purposes but owe no corporate tax to the state.

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