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Post-Wayfair: Burden or Favor

Posted on Sep. 5, 2022

In this installment of Board Briefs, Tax Notes State advisory board members discuss the impact of South Dakota v. Wayfair four years later.

This article is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

Burden and Favor

Walter Hellerstein
Walter Hellerstein

Walter Hellerstein is the Distinguished Research Professor Emeritus and the Francis Shackelford Professor of Taxation Law Emeritus at the University of Georgia Law School and is a visiting professor at the Vienna University of Economics and Business and chair of the Tax Notes State advisory board.

At the risk of being accused of failing to respond to the question whether Wayfair’s impact should be characterized as imposing a burden or doing a favor, my short answer is “both.” On the fundamental question whether Wayfair may be characterized as doing us a collective “favor,” I believe there should be no dispute over the correctness of an affirmative response. As the Wayfair opinion declared in embracing a nexus concept based on economic presence and repudiating one confined to physical presence (quoting authority with which I can hardly disagree), “‘while nexus rules are clearly necessary,’ the Court ‘should focus on rules that are appropriate to the twenty-first century, not the nineteenth.’”1 Indeed, the problems created by the preexisting nexus rules have long been recognized. They include the increasing revenue losses suffered by state and local governments due to their inability to collect taxes from vendors engaged in e-commerce; the economic incentives for businesses to locate their selling activities to avoid collection responsibilities; and the competitive disadvantages such practices create for local businesses.2

Moreover, this is not simply an idiosyncratic position rooted in American exceptionalism. There is global recognition of the proposition that nexus rules based on economic presence are appropriate for an increasingly digitalized economy.3 As the OECD secretariat declared in its proposal for developing a “unified approach” to the tax challenges of the digital economy:

In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence. The current rules dating back to the 1920s are no longer sufficient to ensure a fair allocation of taxing rights in an increasingly globalised world. . . . The Secretariat’s proposal is designed to respond to these challenges by creating . . . a new nexus.4

To be sure, the secretariat’s “new nexus” proposal is associated with the creation of “new taxing rights” and the “allocation of taxing rights,”5 about which there was no issue in Wayfair, which focused on nexus for tax collection purposes (what I have called “enforcement jurisdiction”), as distinguished from “substantive jurisdiction” (attribution of taxing rights).6 Nevertheless, the substance of the secretariat’s nexus proposal — “a sustained and significant involvement in the economy of a market jurisdiction” indicated by a “revenue threshold”7 — is essentially the same as the nexus concept embraced by the Wayfair Court, “carrying on business” in a jurisdiction through “economic and virtual contacts” indicated by revenue and transactional thresholds8 and by the “significant economic presence” standard of nexus embodied in U.S. state direct tax case law.9

Even if Wayfair has done us a collective “favor” by adopting a nexus rule “appropriate to the twenty-first century, not the nineteenth,” the question remains whether adoption of that rule has also imposed a “burden” upon those subject to economic nexus rules. Again, my answer to this question is “yes,” but with the hope and expectation that the burden will decrease substantially over time. Although I have not yet had the benefit of reading my fellow board members’ contributions to this installment of Board Briefs, I can assert with a high degree of confidence that many of these contributions will describe these burdens in detail,10 and there is no need for me to repeat them. Instead, I will devote my remaining comments to supporting my belief that these burdens will decrease over time.

Although the potential burdens associated with the post-Wayfair nexus rules are widely recognized,11 so are the measures that could significantly reduce those burdens.12 These include adoption of thresholds relieving small businesses of remote tax collection requirements, providing simplified and centralized administration of state and local tax obligations, providing uniform product definitions across states, and providing for enhanced administrative coordination and cooperation among states. I am of the view that the states, with guidance from such organizations as the Streamlined Sales Tax Project, the Multistate Tax Commission, and the Federation of Tax Administrators — perhaps with some direction from Congress under the affirmative commerce clause — will adopt measures reflecting these recommendations and reduce the existing burdens on businesses in the post-Wayfair universe.

Halfway There: What’s the Post-Wayfair Commerce Clause Test[s]?

Jeffrey A. Friedman
Jeffrey A. Friedman

Jeffrey A. Friedman is a partner in the Washington office of Eversheds Sutherland (US) LLP.

The Court’s 5-4 decision repealing the physical presence nexus standard left us without a real replacement. The Court’s majority determined that the now-discarded physical presence standard was an “extraordinary imposition by the Judiciary on the States’ authority to collect taxes and perform critical public functions.” But the Court failed to fill the void.

In providing context to its decision, the Court described its analysis that it applies to dormant commerce clause challenges as containing two principles:

  • a virtual per se rule of invalidity of a state law that discriminates against interstate commerce; and

  • a rule that invalidates a state law only if the burden it places on interstate commerce is clearly excessive in relation to its purported local benefits.13

The latter test, often referred to as Pike14 balancing, balances the benefits of the law compared to the burdens it creates. Prior to Wayfair, courts typically limited their dormant commerce clause analyses to the well-known four-prong test found in Complete Auto15: A tax will be upheld if it (1) applies to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state.16 The Wayfair Court did not go as far as mandating a Pike balancing test to replace the physical presence nexus standard under Complete Auto. Rather, the Court included Pike balancing as one of several “aspects” of its commerce clause analysis that can fill the gap created by the repudiation of physical presence. In the aftermath of Wayfair, courts must determine when to apply the Complete Auto four-prong test and/or the Pike balancing test.

Not surprisingly, courts have come up with different and inconsistent formulation. For instance, in Kansler,17 the Mississippi Supreme Court was presented with a challenge to the state’s statute of limitations. The court found that the statute of limitations did not violate the Complete Auto four-prong test. It also applied the Pike balancing test. In doing so, the court acknowledged that the statute of limitations does not discriminate against interstate commerce on its face, but the taxpayer’s claim that it does burden interstate commerce “to an extent, has some merit.”18 Nevertheless, the taxpayers failed to meet their burden of proof, and the court rejected their commerce clause claims.

In Ooma,19 the Oregon Supreme Court found that an out-of-state taxpayer had substantial nexus with Oregon. Oregon assessed e911 tax, and the taxpayer claimed that the assessment violated the due process and dormant commerce clauses. Both claims were rejected by the court. The taxpayer argued that it did not have substantial nexus under the Complete Auto test because it did not maintain an extensive virtual presence in Oregon, even though it derived more than $2.2 million in receipts over 39 months. The court characterized the taxpayer’s argument as “unpersuasive” because “it necessarily follows that a company that earned far greater revenue and engaged in far more transactions than involved in Wayfair must be deemed to have also availed itself of the substantial privilege of carrying on business in Oregon.”20 The court rejected the taxpayer’s argument that “extensive virtual presence” is a nexus requirement. More importantly, the court did not apply — or mention — the Pike balancing test.

The Alaska Supreme Court applied the Pike balancing test and the Complete Auto four-prong test in its recent decision finding that a corporate income tax payer must include unitary affiliates located in foreign low-tax jurisdictions in its combined tax return.21 Having concluded that the Alaska treatment did not violate Complete Auto, the court applied Pike balancing and held that the statute’s purpose of preventing tax avoidance was not outweighed by the claimed burdens placed on interstate commerce, including the fact that the statute may apply to some taxpayers that were not seeking to avoid Alaska tax.

Wayfair is a relatively new decision, especially given its significant impact on dormant commerce clause analyses. Perhaps this semi-endorsement by the Alaska Supreme Court sums up where we are: “Pike nonetheless appears to be the standard, as the [U.S. Supreme] Court has not overruled it or held that it generally is inappropriate in cases like this one.”22

What Wayfair Did and Didn’t Do

Helen Hecht
Helen Hecht

Helen Hecht is general counsel to the Multistate Tax Commission.

“Post-Wayfair: Burden or Favor?” That’s the enigmatic question these board briefs are supposed to address. (I read it as a question, in any case.) You may expect that mine will be the lone voice answering — favor. If so, you may be surprised.

First, let me say that I have no intention to understate or dismiss the burden that collecting sales tax places on some small businesses. That burden has been around for a long time. States do well to recognize that burden and take steps to lessen it. But the question implies that, somehow, the Supreme Court’s decision in Wayfair23 was the critical turning point.

I suppose there are two different ways to read the question. The first is whether the Wayfair decision itself effectively imposed burdens on interstate commerce or granted a favor to the states. I’m guessing most people would say both. But I can’t agree.

As for Wayfair favoring the states, what the Court did was correct a mistake, as even the dissent repeatedly admitted, that improperly outlawed sales tax collection enforcement for 25 years (50 if you count Bellas Hess24). That hardly constitutes a “favor.”

And as for Wayfair burdening interstate commerce, even indirectly, that is also a vast overstatement. By the time Wayfair was decided, the states had prevailed in DMA v. Brohl,25 establishing that they could require remote sellers to report in-state sales so that tax could be assessed to their buyers. And by that time, many states were asserting that a seller’s inventory in a state would provide physical presence nexus, even if that inventory was in the hands of marketplace facilitators. Some states were also considering “affiliate nexus” laws (and the MTC drafted a model law) and others — including Minnesota, Rhode Island, and Washington — had begun to pass laws requiring marketplace facilitators to collect tax. Amazon, for its part, conceded that it would begin to collect the tax for its sellers — for a fee.

This last fact was commented on by Justice Kagan at oral argument, saying:

I think what Justice Ginsburg was perhaps suggesting was that all these functions would be essentially taken over by companies like Amazon and eBay and Etsy, that they would do it for all the retailers on their system. Now there’s something a little bit ironic in saying the problem with Quill is that it benefited all these companies, so now we’re going to overturn Quill so that we can benefit the exact same companies. But — but I think that that’s the idea; that, in fact, this would not fall on individual entrepreneurs, that it — instead, they would pay fees to companies like Amazon.

It’s not that Wayfair wasn’t an important case. Any time the U.S. Supreme Court overturns long-standing precedent, it’s important. It’s just that by the time the Court finally got around to reconsidering Quill,26 simply upholding it would not have shielded interstate commerce. And it could be argued that Wayfair led states to adopt thresholds that they might not have otherwise.

So if the question is whether Wayfair was a force that somehow acted to either burden interstate commerce or favor the states, then the answer is — it did neither.

But there is another way to read the burden-or-favor question. When I heard the words “burden or favor,” what initially came to my mind was not the dormant commerce clause (the subject of Wayfair), but the First Amendment and the centuries of precedent holding that the government may neither “burden” (prohibit the free exercise of) nor “favor” (establish) religion. It seems to me the Court might do well to apply that same idea — that government treat all religions equally — to interstate commerce.

I was particularly struck by one thing in the Wayfair dissent. There, Chief Justice Roberts noted, in conclusion: “An erroneous decision from this Court may well have been an unintended factor contributing to the growth of e-commerce.” He likely meant that as a kind of justification for Quill. If so, he was misguided. In opposing Quill, states had long made the case that it improperly favored internet marketplaces and other large remote sellers, putting smaller local businesses at a significant disadvantage. Surely that cannot be the basis for the dormant commerce clause doctrine.

Indeed, that idea was put to rest in Western Live Stock27 in 1938, when the Court famously noted: “It was not the purpose of the commerce clause to relieve those engaged in interstate commerce from their just share of state tax burden even though it increases the cost of doing the business.”

So, if the question is whether the Wayfair decision improperly burdens or favors interstate commerce, then the answer is — no. And rightly so.

Welcome to the Post-Wayfair ‘Wild West’

George S. Isaacson
George S. Isaacson

George S. Isaacson is a senior partner at Brann & Isaacson in Maine and represents multichannel marketers and electronic merchants throughout the United States in connection with state sales and use and income tax matters.

To describe the post-Wayfair landscape as “chaotic” would be an understatement. State revenue departments have treated the Wayfair decision as a license to treat most facets of e-commerce as a sufficient basis to justify extending their tax jurisdiction beyond their states’ geographic borders. The result has been an ever-expanding assortment of new tax obligations imposed on businesses whose only contact with a state is communicating with its residents via the internet.

The aggressive stance of state revenue departments is not confined to sales/use taxes, which was the limited issue before the Supreme Court in Wayfair. The MTC is now promoting a reinterpretation of P.L. 86-272 that would treat most web-related activities as “unprotected,” and thus expose out-of-state companies to state corporate net income taxes.

The California Franchise Tax Board leaped at this new revenue opportunity, and in February it adopted — without complying with the state’s Administrative Procedure Act — the MTC’s recommendations, thereby effectively eviscerating the safe harbor of P.L. 86-272 and subjecting thousands of companies that have no facilities or employees in the Golden State to California’s 8.84 percent corporate income tax — one of the highest in the nation.

Even more audaciously, the Massachusetts Department of Revenue has taken the position that it can apply the Wayfair economic nexus standard retroactively to periods prior to June 21, 2018 — the date the Supreme Court issued the Wayfair decision. The following are direct quotes from a brief filed by the Massachusetts Commissioner of Revenue in a taxpayer case challenging a use tax assessment that was based upon the retroactive application of Wayfair.

The brief’s section heading reads: “Decisions of the U.S. Supreme Court on Matters of Federal Law Must Be Applied Retroactively.”

The commissioner proceeds to argue that once the Supreme Court interprets a constitutional provision, including overruling precedent, its holding is not limited to prospective application, but instead governs all prior periods as well — even if the taxpayer relied upon clear and previously controlling Supreme Court precedent. The commissioner’s argument concludes:

Thus, the [Appellate Tax] Board erred in declining to give Wayfair retroactive effect in this case based on the taxpayer’s claim of reliance on Quill.”28

The implications of applying Wayfair’s “economic nexus” standard retroactively are staggering. Companies that were guilty of nothing more than relying upon the Supreme Court’s “physical presence” nexus standard during the years that it was the controlling rule would nonetheless be subject to enormous potential liability for a wide variety of state taxes. The commissioner, in his brief, acknowledges that the taxpayer argued that:

“. . . retroactive application of Wayfair would violate its due process rights by imposing tax liability on conduct that was ‘lawful’ at the time US Auto engaged in it, that US Auto had reasonably relied on Quill, and that ‘[c]ompliance with the law does not require clairvoyance.’”

Nonetheless, the commissioner maintains that the retroactivity of Supreme Court decisions is absolute, and that “application of the ‘Substantial Nexus’ standard to this case does not violate Due Process principles.”

Significantly, the commissioner states that retroactivity “is not limited to cases involving taxes already collected, or indeed, cases involving taxes at all.” Just pause to consider the potential consequences of such an extreme position. For example, if the Supreme Court were to overrule its 2015 decision in Obergefell v. Hodges establishing a constitutional right to same-sex marriage, the commissioner’s absolute retroactivity theory would have devastating results. In those 25 states that still have laws on the books defining marriage as the union of one man and one woman (which have been unenforceable due to the Obergefell decision), the overruling of Obergefell, with retroactive effect, would mean that same-sex marriages entered in reliance on Obergefell would immediately be deemed invalid. (Note: The “physical presence” rule in Quill and Bellas Hess was of much longer duration than the relatively recent change in marriage eligibility declared in Obergefell.)

The post-Wayfair era has been troubling from a state tax perspective for three reasons:

  1. The expansion of state tax jurisdiction has resulted in greater complexity, inconsistency, expense, and administrative errors. Software has not resolved many of the compliance issues, despite the false promise that computers would make tax collection easy and cheap.

  2. Congress has failed to enact legislation requiring greater uniformity and simplification in the administration of state taxes. Congress clearly has the power to protect interstate commerce from the burdens described above, but Washington remains absorbed with other issues and political intrigues.

  3. States have seized upon the Wayfair ruling in their efforts to impose tax liability far beyond the four corners of that decision. It has left the law uncertain and confusing.

Welcome to SALT’s “Wild West.”

Burden or Favor in the Eye of the Beholder

Carolynn Kranz
Carolynn Kranz

Carolynn Kranz is a partner at Kranz & Associates PLLC in Pennsylvania.

More than four years have passed since the Court rendered its decision in Wayfair, changing the landscape for online sales forever. The true impact of Wayfair and whether it is a burden or a favor is, like beauty, a matter of perspective. Wayfair prompted a wave of legislation largely mirroring the economic nexus provisions enacted by South Dakota. Since that time, every state that imposes a sales and use tax has put in place economic nexus provisions either legislatively or through policy decisions. Obviously, for the states and local governments, Wayfair has been the blessing they craved.

From the perspective of businesses with a large national footprint, including brick-and-mortar businesses, the Wayfair decision was desired to create a more level playing field from a tax perspective. The decision led to tax collection by competing remote sellers unless they fall below a jurisdiction’s de minimis provisions. Goal accomplished.

However, from the perspective of a pure remote seller, the Wayfair decision has created increased burdens — the greatest of which is implementing a sales and use tax system that not only makes the proper tax determination on its products and services but also leads to the proper tax computation. While state taxing authorities might believe such an integration should be straightforward, particularly with the availability of free technology models, this is simply not the case.

For any seller making sales of products that are not taxable across all states, tax compliance gets thorny. Consider a seller in the software as a service (SaaS) space: Not only is there inconsistency in whether a jurisdiction taxes SaaS, but there are also discrepancies insofar as which SaaS models are taxable in each particular jurisdiction. One jurisdiction might only tax remotely accessed software, while another is looking to also tax all SaaS models.

Coupled with that issue is the burden of collecting tax at the proper rate. One would think that use of an automated system would minimize this burden. Yet the effectiveness of this automated system is largely dependent upon the information that the seller collects in consummating the sale. With over 10,000 taxing jurisdictions, the determination of the proper location of the sale is based on a nine-digit ZIP code. While most automated sales and use tax systems can determine this nine-digit ZIP code if a street address is also available, this is not always the case. More importantly, for sellers in the digital space, a street address is generally not required to consummate the sale. Thus, to the extent that a seller has only collected a five-digit ZIP code in consummation of the sale, it may not systematically be able to determine the proper location for the sale and may improperly compute the sales and use tax rate. This fact has been recognized by those active in the Streamlined Sales Tax Project and is an issue being vetted by the State and Local Advisory Council.

Finally, the Wayfair decision for practitioners has been both a favor and a burden. Certainly, the need for consulting services in light of the Wayfair decision has increased, but so has the complexity of providing sound advice. Consider the following:

  • Each jurisdiction has its own threshold, which can be a dollar threshold, a transaction threshold, or both.

  • The measure of these thresholds varies by jurisdiction — some use a prior calendar year, some a rolling 12 months, and some another measure.

  • The threshold calculation in each jurisdiction varies — some use gross receipts, some taxable receipts, and some gross receipts less sales for resale.

  • Once the threshold is exceeded, the timeline for when collection is mandated also varies — some jurisdictions require collection as soon as the next day, some the next month, some on the first day of the next calendar quarter, etc.

At the end of the day, whether Wayfair is a burden or a favor is in the eye of the beholder.

Pennies From Heaven

Janette M. Lohman
Janette M. Lohman

Janette M. Lohman is a partner in the St. Louis office of Thompson Coburn LLP.

Whether Wayfair was a burden or a favor depends on whom you ask, but it certainly has made life interesting in the world of sales and use taxes over the past four years.

If you were to pose the question to the 45 states and the District of Columbia that impose sales and use taxes (the “Taxing States”), these governments thank the SCOTUS for the Wayfair favor on a daily basis, not to mention their extremely responsive legislators. All the Taxing States have enjoyed ever-increasing use tax revenues dropping into their coffers without having to worry about seeking additional appropriations to fund increased collection costs, and it sure didn’t take long for the Taxing States to put the new economic nexus statutes in place. Massachusetts jumped the gun and imposed the “second” economic thresholds in 2017, and the other Taxing States came on board in a relatively steady stream over the next three years, each having its own effective date. By the end of 2020, all but one of the remaining Taxing States had an economic nexus statute in place.29

What foresight the SCOTUS and these state legislators all had! Almost all the Wayfair statutes were enacted just in time to provide a counterbalancing cushion against the vicissitudes of COVID-19! The Taxing States’ increased use tax collections from internet sales mitigated the drastic reductions of sales tax collections from brick-and-mortar retailers, restaurants, and any businesses that were shut down during the pandemic. Recent studies and surveys compiled and prepared by sources like the U.S. Government Accountability Office and the National Conference of State Legislatures indicate that the Taxing States’ revenues attributable to internet or other remote sales increased dramatically each year from 2018 through 2021 as the new state laws became effective. Predictions are that Taxing States’ revenues will continue to trend upward as more internet and other remote retailers are coming into compliance.

The best part of the Wayfair favor to the Taxing States is that these increasing use tax revenues just drop to the bottom line like pennies from heaven. Yes, that’s right — the Taxing States didn’t have to spend comparatively much in order to collect it. Unfortunately for businesses, however, the compliance burdens have been shifted away from the Taxing States and placed squarely on the internet and other remote businesses. Gone forever are the good ol’ Quill days when the Taxing States had to prove that the remote sellers had substantial nexus through an actual physical presence in order to subject remote sellers to use tax collection. Now, thanks to Wayfair, if a business meets a Taxing State’s threshold, the business is absolutely liable. The business must either pay up or risk the scary consequences of being caught red-handed, not unlike the initial plight of Jean Valjean from Les Miserables.

Even so, if you were to pose the burden-or-favor question to the extremely large remote retailers, they probably couldn’t care less. They, too, were clairvoyant and saw the avalanche coming. Based on the statistics cited by Wayfair’s dissent, 80 percent or more of them were already collecting the taxes and remitting them in most Taxing States prior to Wayfair’s hand down. After all, they could afford to comply, couldn’t they?

But what about the Jean Valjeans? If you were to pose this question to the many small to medium-sized remote sellers, they might not be so disinterested, because their compliance burdens are now overwhelming. These companies that managed to avoid having an actual physical presence whenever possible before Wayfair are now faced with the daunting task of rolling out tax compliance and remittance mechanisms for (eventually) all the Taxing States. If the Taxing States’ legislatures had been kind, they all would have adopted the same economic nexus thresholds that Wayfair approved for South Dakota, but perhaps that would have been asking too much.

Because Wayfair flipped the compliance burden from the Taxing States to the remote sellers, however, the Wayfair ramp-up for companies that meet or beat the minimum thresholds in most of the Taxing States can be rocky due to the lack of uniformity in threshold requirements. For instance, almost all the Taxing States have dollar amounts of sales as a starting point, ranging from $100,000 to $500,000, but some are based on gross sales and others are based on retail sales. Also, some Taxing States have thresholds of either sales or a fixed number of transactions, and at least one Taxing State requires both. Once a threshold is met, there are variations in dates for determining the appropriate time to commence collection, and the base periods fluctuate, too. Is the threshold based on the prior year’s sales vs. the prior 12-months’ sales vs. the prior year’s quarterly sales vs. the current year’s sales, etc.? To make matters worse, some of the Taxing States have started changing their thresholds, so it is always a moving target. Finally, all these remote sellers also have to face the complexities caused by endless variations among the Taxing States in regard to rates, what products or services are taxable, and which states recognize what exemptions for particular items, transactions, and entities.

Although the Taxing States needed the revenues, they’ve always needed the revenues, and the remote sellers do not need these compliance headaches. I blame Congress for this mess, because Congress did not do any favors for the Taxing States or the remote sellers by continuing to sit on this predicament since Quill was handed down back in 1992. It was Congress’s responsibility to regulate interstate commerce, and Congress dropped the ball. What a burden that oversight has created for both the Taxing States and the remote sellers! Think of the 25 or so years of increasing use tax revenues the Taxing States could have collected over the “lost years,” and how much easier it would have been for remote businesses to comply if the collection mechanisms were both fair and uniform!

But it is what it is, and it is unlikely that Congress will choose to fix it now. Mama Lohman would push me forward by saying, “Move on, Honey, jus’ deal with it. Not a lick ’a sense in cryin’ over spilt milk, and complyin’ with Wayfair is now just one mo’ duty that must be performed.”

Shackled With State and Local Compliance Obligations

Amy F. Nogid
Amy F. Nogid

Amy F. Nogid30 is counsel in Alston & Bird LLP’s New York office.

Whether the Supreme Court’s decision in Wayfair31 is a burden or a favor depends on the eye of the beholder. For sales/use tax collection obligations on remote vendors, Wayfair is unquestionably a burden to remote vendors and a favor to state and local governments.

In the tax world, it is critically important to understand the rules. Generally, a physical presence nexus standard was easy to understand and apply — either you’re in or you’re not. That clear, objective standard worked reasonably well until some states attempted an end run around Quill32 by recognizing pseudo-physical presence as a proxy for physical presence. By excising the objective standard, the states muddled the tax nexus standards and sowed confusion. This led to considerable litigation and uncertainty for taxpayers and tax collectors. After Wayfair, most states enacted objective tests for sales/use tax purposes based on the level of sales and/or number of transactions, modeled after South Dakota’s test considered in Wayfair. Eliminating the physical presence standard removed an objective standard, but since so many states had been using an iteration of a “functional equivalent” nexus standard, the enactment of the sales/use tax nexus thresholds could be viewed, perversely, as a “favor” to remote vendors.

However, even that favor has proved to be a burden to remote vendors. They are now shackled with huge state and local compliance obligations and costs, such as software acquisition and updates, tax return preparation, and audit defense. While some remote vendors are large multistate corporations, the post-Wayfair economic nexus tests are modest and may also apply to relatively small vendors. However, under the fourth prong of the Complete Auto test,33 the tax must be fairly related to the services provided by the state in order to meet the commerce clause standards. It is questionable whether that prong is met by small vendors, and challenges on that basis may be appropriate. Wayfair also increases vendors’ exposure to both qui tam litigation (whistleblower suits brought on behalf of the government for undercollecting tax) and class action suits for overcollecting tax. These are scary (and expensive) prospects.

The “favor” is further complicated by states’ uncertain willingness to accept their victory in Wayfair and the sales tax boon that came with it, and to limit Wayfair’s application to periods after the decision’s issuance. The Court in Wayfair noted with favor several aspects of South Dakota’s statute that were “designed to prevent discrimination against or undue burdens upon interstate commerce,” including that it would not become effective until the Court were to overrule Quill. However, the Massachusetts Department of Revenue recently filed its brief in U.S. Auto Parts Network urging retroactivity of its economic nexus position. The department conceded that it was “constrained by the limits of the ‘physical presence’ rule articulated in Quill” when it promulgated its “cookie nexus” regulation.34 Even accepting for argument’s sake that retroactive application of Wayfair is constitutional, just because you can doesn’t mean you should.35

The states are clearly the victors post-Wayfair. To reach a benefit-burden equilibrium and secure broad compliance, state revenue departments should work with remote sellers to minimize their burden. Clear guidance, voluntary disclosure programs, judicious application of penalty provisions, and confirmation that Wayfair will not be applied retroactively for any tax type would be a good start.

Removing the Sales Tax Skeletons From the Closet

Timothy P. Noonan
Timothy P. Noonan

Timothy P. Noonan is a partner in the Buffalo and New York offices of Hodgson Russ LLP.

Like any good lawyer, I’ll provide a qualified answer to this question: It depends.

Indeed, in June 2018 when the Wayfair decision was issued, I suppose my reaction was similar to that of many out there, which was fear that this would set up a multistate quagmire that would be extremely harmful and damaging for all taxpayers. And to some extent, this happened, with almost every single state jumping quickly on the Wayfair bandwagon and imposing economic nexus provisions that looked more or less like the South Dakota version that was implicitly blessed by the Supreme Court in its decision. So given that the decision resulted in increased compliance burdens across more than 40 states in just a matter of months, there is no doubt that Wayfair created a significant burden, especially on small or mid-size businesses that either don’t have the time to deal with such massive multistate compliance or the resources to pay someone else to do it for them.

On the other hand, the much-feared quagmire of different rules and thresholds never really materialized. For the most part, states followed the South Dakota model, with only a handful of outliers using different thresholds or provisions. In my state of New York, for example, the rules actually provide for higher thresholds for economic nexus, requiring both a higher dollar threshold ($500,000 versus the South Dakota threshold of $100,000) and that a taxpayer meet BOTH the dollar amount threshold and the transactional threshold (which in New York is only 100 transactions). Plus, New York only applies these economic presence provisions to sales of tangible personal property. Thus, out-of-state service providers with no physical presence in the state have a reasonable legal position that they are under no obligation to collect and remit New York tax. Whatever the case, despite New York’s need to be different, there’s a lot of conformity between states on the requisite thresholds. So figuring out these thresholds and trying to manage them on a state-by-state basis hasn’t actually been all that difficult, given the significant consistency we see between the states.

Also, there’s a case to be made that Wayfair does many businesses a favor. The reason is quite simple: Prior to Wayfair, states had been doing their level best to chip away at the physical presence rules, with almost all deeming ties as minimal as a couple visits by a salesperson over the course of a year as sufficient to create nexus, and states like Massachusetts getting more creative with “cookie nexus” rules and the like. And while these aggressive rules didn’t really cause companies to rush to the states’ sales tax registration office to sign up, they did rear their ugly head in mergers and acquisitions transactions. I’ve had countless situations where a buyer in a deal raises all sorts of thorny multistate nexus issues after the due diligence process, and in almost every case the sellers are stuck having to clean up years of past-due taxes or offer up indemnifications based on annoying — but often correct — assertions by the buyer that sales tax nexus did exist in prior years despite minimal connections.

But Wayfair makes that analysis a lot easier. Now with clearer thresholds in place, you have so many more companies volunteering to step up and register to collect sales taxes in pretty much all the states where they are doing business. So when those companies go through an eventual acquisition, they hopefully won’t have the sales tax skeletons in the closet that they may have had if they proceeded under the old nexus rules. Maybe this isn’t much of a favor to us tax lawyers, as I certainly enjoyed working on many projects over the past twenty years where we were called in for clean-up duty! But it sure is a favor to a lot of buyers and sellers, removing one thorny issue from a multitude of issues that come up in acquisitions.

Post-Wayfair: The Good, the Bad, and the Ugly36

Mark J. Richards
Mark J. Richards

Mark J. Richards37 is a partner in the Indianapolis office of Ice Miller LLP.

It has been over four years since the Supreme Court’s Wayfair38 decision. While states acted quickly following that decision to commence unprecedented efforts at enforcement, those efforts were likely stunted, at least temporarily, by the pandemic. That said, here are a few observations of the post-Wayfair impact so far.

The Good (for Some)

State Revenues: The state of Indiana estimates that, for fiscal year ended 2022, Wayfair added roughly $661 million to its coffers.39 Marketplace facilitator laws have played a large part in that collection success. In Indiana, marketplace facilitators accounted for roughly $408 million of that $661 million. While that may not be “good” for those who must pay or collect and remit the tax, that additional revenue should reduce the state’s need to impose or raise other taxes, if not generate tax reductions or tax refunds.

Fairness . . . to Some: Conceptually, Wayfair mitigated the competitive “unlevel” playing field of internet retailers versus brick-and-mortar stores. But did it tilt the scales in the other direction?

Compliance Software Service Providers: The burden of sales and use tax compliance, greatly exacerbated by Wayfair, has fueled the growth of a cottage industry of companies that offer software and other services to assist retailers with Wayfair compliance.

Politicians: Wayfair offered states additional revenue without raising taxes on their resident voters (since Wayfair arguably just provided a better way to collect taxes already owed by consumers). To the extent that a state government can impose (or appear to impose) tax burdens on out-of-state companies instead of resident voters, help address the inequities suffered by in-state brick-and-mortar stores (and thereby retain and attract businesses and jobs in the state), and then generate tax refunds to its resident voters (as Indiana just did40), that formula presumably sells well to voters.

The Bad

Compliance Costs: Wayfair created a significant compliance cost for businesses with new registrations, regular state filings, collection and remittance, determining all aspects of their legal obligations, etc. From a practical standpoint (though maybe not a legal one), Wayfair also reflects an added cost to consumers on purchases not previously taxed by the retailers.

Wayfair Uncertainty: Wayfair arguably raised more questions than it answered. The result of that was the adoption of inconsistent laws from state to state, and different administrative interpretations from state to state, with more to come as post-Wayfair audits begin to emerge.

Marketplace Facilitator Uncertainty: States rushed to enact marketplace facilitator laws, often using a “ready, fire, aim” approach that resulted in substantial inconsistencies between states, raising even more uncertainties and inconsistencies. Some marketplace facilitator laws include taxes imposed on consumers apart from sales tax, such as food and beverage taxes, accommodation taxes, and the like, injecting additional complexity and inconsistencies from state to state. And while these laws were intended to facilitate collection, some appear to broaden the tax base.

A Moving Target Matrix: This is not just a daunting one-time exercise in trying to understand the new laws, and agencies’ interpretations of those laws, of each state post-Wayfair; it is also an exercise in monitoring the ongoing changes in those laws, whether statutorily, administratively, or eventually through litigated cases. And on top of that, companies must monitor changes in their own businesses, including changes in annual sales, as well as changes in technology, to determine how those changes affect their obligations in each state.

The Ugly

Unfairness/Prohibitive Costs . . . to Others: While Wayfair may have increased fairness for some, it certainly created unfairness for others — notably small businesses with just enough sales to trip over thresholds but not enough net revenue to afford the burdensome compliance costs.

Home Rule States: States that continue to allow locally administered sales taxes present an additional level of burdensome compliance costs and constitutional issues.41

Children of Wayfair: Many states aren’t satisfied with the additional sales and use tax revenue; they are stretching the Wayfair principles to undermine the protections of P.L. 86-272 and expand the reach of income tax nexus.

Out-of-State Audits: The cost and frustration of Wayfair compliance suffered by small businesses may be exceeded by the cost and frustration of dealing with inquiries, billings, and audits by states where they don’t reside. With little familiarity with those states, this will present challenges for them. This chapter of the post-Wayfair book is not yet fully written.

Congress: Wayfair, and state actions resulting from it, were a result of Congressional inaction. Congress could facilitate a uniform approach that would provide greater clarity, consistency, and certainty and benefit taxpayers and states alike if done right. No signs of that happening.

We are far from done with this story. In the words of New York Yankees great Yogi Berra, “it ain’t over till it’s over.” Stay tuned.

Pushing the Scope of Wayfair

Marilyn A. Wethekam
Marilyn A. Wethekam

Marilyn A. Wethekam is a partner with HMB Legal Counsel and co-chairs the firm’s multistate SALT practice.

It has been four years since the Supreme Court issued its decision in Wayfair.42 A fundamental question is how the decision and the concepts articulated by the Court have changed the state tax landscape. Also, what issues continue to linger due to the changes in the landscape? To address these questions, it is important to take a step back and examine what the Court held and how those concepts have been interpreted and applied by taxing jurisdictions. The Court applied both a due process and commerce clause analysis in reaching the holding that physical presence was an unsound standard and not required to obtain jurisdiction over a retailer for purposes of collecting sales tax.43 In so doing the Court once again blurred the lines between the due process and commerce clause restrictions. The result was that economic and virtual contacts with a taxing jurisdiction now replace the physical presence jurisdictional requirement for sales taxes.

These contacts are now measured by sales dollars and numbers of transactions. The Court, while recognizing the South Dakota threshold to be reasonable, did not specifically conclude that the threshold was the floor for determining what was sufficient economic or virtual presence. The lack of confirmation opened the door for speculation as to whether there is such a concept as a constitutional minimum standard, and if so, what it is. Also not addressed was a commerce clause issue related to what type of collection requirements would result in placing an undue burden on interstate commerce. The lack of guidance on these items is a contributing factor to the lingering Wayfair issues.

Over the last four years both state and local tax jurisdictions have been interpreting the Court’s decision in the development and implementation of a tax collection framework. The unanswered questions and issues arising because of the taxing jurisdictions’ implementation of the decision are fundamental to any analysis of whether the Wayfair decision was a favor or a burden. In a post-Wayfair world, to impose a collection requirement on a remote retailer, that retailer’s activities must exceed specific thresholds. The concept sounds simple enough. However, it raises the question of how the threshold is computed. For example, does a retailer use gross or net receipts to compute the threshold? Are wholesale or sales for resale included in the computation? How does one account for related-party sales? If the retailer sells on both a marketplace and through its own website, do all the sales count toward meeting the threshold? As transactions become more complex, the uncertainty is magnified. The devil is in the details. While taxing jurisdictions have issued guidance addressing some of the issues, there is a lack of uniformity. The unanswered question is whether the lack of uniformity could rise to the level of placing an undue burden on interstate commerce.

Local taxing jurisdictions, while professing to adopt the concept of economic nexus, have been slow in providing guidance as to how the concept will be implemented. The lack of guidance requires taxpayers to speculate if the thresholds are the same as the state thresholds. In other words, to impose a collection requirement, the retailer activities in the local jurisdiction must meet the dollar and transaction threshold imposed by the state.44 Assuming the same threshold applies, under this structure a compliance obligation is created. A retailer would be required to determine if it met the threshold in each local jurisdiction into which it sold goods. There is a question whether tracking the data necessary to determine if the threshold has been met and the compliance obligation created rises to the level of an undue burden.

Alternatively, does acquiring economic nexus at the state level automatically result in economic nexus at the local level, regardless of the sales dollars or number of transactions made in the local jurisdiction? The question yet to be addressed is whether this approach runs afoul of what the Court concluded in Wayfair protected against placing an undue burden on interstate commerce.45 In general, home rule jurisdictions have their own tax structures. While the home rule jurisdiction may be limited by either the state constitution or statutes as to the types of taxes that can be imposed, the local tax structure may not be the same as the state tax structure. As a result, the state safe harbor threshold may afford no protection at the local level. More importantly, there may be no uniformity in the definition of a taxable transaction. Local jurisdictions are free to determine what products or services are subject to tax and at what rates. Thus, the uniformity factor relied upon by the Court to mitigate the undue burden on interstate commerce may not exist. Is the lack of uniformity alone sufficient to run afoul of commerce clause protections, or is more required?

The Court’s decision provided a basic framework that changed the state tax landscape. However, the changing state tax landscape and the attempt on the part of some jurisdictions to push the scope of the Wayfair decision has created new issues and challenges. The state courts relying on the Court’s framework will be required to address these unanswered questions. Therefore, it’s too early in the process to conclude whether the Wayfair decision was a favor or a burden.

The Intended and Unintended Beneficiaries of Wayfair

Kathleen K. Wright
Kathleen K. Wright

Kathleen K. Wright is the director of the state and local tax program in the School of Taxation at Golden Gate University, San Francisco.

In Wayfair46 the Court overturned the physical presence standard set forth in Quill.47 The Court held that the physical presence rule in Quill is an “unsound and incorrect” interpretation of the commerce clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. Since the Wayfair decision and as of June 2021, all 45 states that assess a sales tax, plus the District of Columbia, have adopted economic thresholds that (if met) would require the out-of-state vendor to collect and remit sales tax to the state. Many of these states adopted the South Dakota threshold of 200 transactions or $100,000 in sales in the state each year. California did not “jump on the bandwagon” immediately but did enact a single economic nexus threshold of $500,000 (effective April 1, 2019).48

The outcry from small business was immediate — the cost of compliance and the undue administrative burden resulting from the Wayfair decision was going to put many businesses out of business. The states tried to respond to these complaints by enacting safe harbors for small sellers and by shifting tax collection obligations from sellers in a marketplace to the companies facilitating the sales. A good discussion of some of the choices the states have made in implementing the application of the principles of “economic nexus” to the sales tax collection/remittance process can be found in a study published by the Tax Foundation in December 2019.49

The Intended Beneficiary

The intended beneficiary of the Wayfair decision was (of course) state and local government. Before Wayfair, states could not require businesses operating outside their borders to collect sales taxes on sales to residents of the state unless the business had a physical presence in the state. Various procedures were developed to encourage customers to voluntarily report and pay sales tax on remote purchases, but compliance was poor and enforcement almost nonexistent.

Has Wayfair resulted in a substantial increase in collection by the states of sales tax on remote sales? On June 14 the GAO released a study titled “Remote Sales Tax: Initial Observations on Effects of States’ Expanded Authority.”50 The GAO surveyed the 45 states with a statewide sales tax (plus the District of Columbia) asking them to provide information on revenue from all remote sales for the years 2018 through 2021. The results are impressive regarding the increase in revenue, as illustrated by the following chart:

Year

Revenue From All Remote Sales (in millions)

Number of States Reporting

2018

$3,200

21

2019

$6,735

26

2020

$16,328

31

2021

$23,104

33

Obviously, states have experienced sales tax revenue increases, and although perhaps it’s too early to draw conclusions, it appears that this could be an ongoing trend as the impact of Wayfair works its way through the economy.

An Unintended Beneficiary

But readers of Tax Notes State are also well aware that the impact of any decision in state tax is going to have unexpected consequences in many areas of the law — and that is the case with the decision in Wayfair. The impact of the Wayfair decision is far reaching, as seen in the application and analysis included in a recently released California technical advice memorandum.51

The memorandum addresses whether the protections of P.L. 86-272 apply to fact patterns that are common in the current economy due to “technological advancements.” With the publication of TAM 2022-01 California became the first state to publicly adopt aspects of the MTC’s revised “Model Statement of Information Concerning Practices of Multistate Commission and Supporting States Under Public Law 86-272.”

The revised statement — approved by the MTC in August 2021 — addresses the application of P.L. 86-272 to business activity conducted by an internet seller. Importantly, under the revised MTC statement, if a business interacts with a customer via the business’s website or app (as opposed to providing static text and photos to the customer), the business is generally considered to be engaged in a business activity within the customer’s state. The MTC statement (adopted by California) reaches a very favorable result for the states, as it significantly expands the scope of internet activity that is not protected by P.L. 86-272 and is thus subject to the California income or franchise tax.

TAM 2022-01 essentially takes the position that anything more than “passive” activities undertaken by the taxpayer on its website with customers is not mere sales solicitation and is not protected by P.L. 86-272. The justification provided by the FTB in TAM 2022-01 for this restrictive view of P.L. 86-272 is Wayfair. Wayfair made clear that an internet seller “may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.” The FTB goes on to state in the memorandum that although the Court was not interpreting P.L. 86-272 in Wayfair, California considers the Court’s analysis as to virtual contacts to be relevant to the question whether a seller is engaged in business activities in states where its customers are located for purposes of P.L. 86-272.

P.L. 86-272 affects many areas of the tax law, and one of them is throwback. P.L. 86-272 affects the determination of whether the state from which the tangible personal property is shipped (termed “the origin state”) may subject the related receipts to that state’s throwback rule. California requires throwback of sales of tangible personal property that are shipped from an office, store, warehouse, factory, or other place of storage located in the state when the taxpayer is not taxable in the state of the purchaser.52 With the reduction of the application of P.L. 86-272 protection for several e-commerce transactions, these transactions will now be deemed to be taxable in the destination state and no longer subject to throwback. This is generally a good result for the California taxpayer as the tax rates in California (8.84 percent) are often higher than the tax rate in the destination state.

Example. Assume that ABC Company is a California corporation commercially domiciled in the state. It produces and ships state-of-the-art photography equipment all over the United States. Included in the price of the equipment is post-sale assistance to customers through electronic chat or email that customers initiate by clicking on an icon on the business’s website. The company regularly advises customers on assembly and use of the products once they have been delivered. Prior to Wayfair, ABC was taxable only in California as it had no physical presence in any of the destination states where it shipped its product, so the sales would throwback and be taxed by California. Post-Wayfair (and with the issuance of TAM 2022-01) we learn that California will view these sales as no longer protected sales and will assume that they are subject to tax in the destination state. If the destination state has a lower tax rate than California, then the California taxpayer may be pleasantly surprised to learn that it has a much lower overall state tax liability.

FOOTNOTES

1 South Dakota v. Wayfair Inc., 138 S. Ct. 2080, 2092 (2018) (quoting Walter Hellerstein, “Deconstructing the Debate Over State Taxation of Electronic Commerce,” 13 Harv. J. L. & Tech. 549 553 (2000)).

2 See, e.g., Donald Bruce, William F. Fox, and LeAnn Luna, “State and Local Sales Tax Revenue Losses From E-Commerce,” State Tax Notes, May 18, 2009, p. 537.

3 See Hellerstein, “Reflections on the Cross-Border Tax Challenges of the Digital Economy,” Tax Notes State, Nov. 25, 2019, p. 615, at 617-627.

4 OECD, “Secretariat Proposal for a ‘Unified Approach’ Under Pillar One,” at 6 (2019).

5 See Hellerstein, supra note 3, at 631-632.

6 Hellerstein and Andrew Appleby, “Substantive and Enforcement Jurisdiction in a Post-Wayfair World,” State Tax Notes, Oct. 22, 2018, p. 283.

7 OECD, supra note 4, at 8.

8 Wayfair, 138 S. Ct. at 2099.

9 See Jerome R. Hellerstein, Hellerstein, and Appleby, State Taxation para. 6.11 (updated through Aug. 2022).

10 See also Benjamin Valdez, “Senate Committee’s Wayfair Hearing Focuses on Compliance Burden,” Tax Notes State, June 20, 2022, p. 1281.

11 See, e.g., the testimony in the recent Senate Finance Committee hearing on Wayfair compliance burdens referenced id.

12 Id.

13 Wayfair, 138 S. Ct. at 2091.

14 Pike v. Bruce Church Inc., 397 U.S. 137 (1970).

15 Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977).

16 Id. at 279.

17 Kansler v. Mississippi Department of Revenue, 263 So. 3d 641 (Miss. 2018).

18 Id. at 652.

19 Ooma Inc. v. Oregon Department of Revenue, 501 P.3d 520 (2021).

20 Id.

21 Alaska Department of Revenue v. Nabors International Finance Inc., No. 7609 (Alaska S. Ct. 2022).

22 Id. at n.102.

24 National Bellas Hess Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).

25 Direct Marketing Association v. Brohl, 575 U.S. 1 (2015).

26 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

27 Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938).

28 U.S. Auto Parts Network Inc. v. Commissioner of Revenue, No. SJC-13283; Brief of the Commissioner of Revenue, filed July 18, 2022 (emphasis added).

29 Why does my own home state, Missouri, always have to be the outlier? Oh, I forget — we’re the “Show Me” State.

30 The views expressed here are mine and mine alone and should not be attributed to Alston & Bird LLP or any of its clients.

33 Complete Auto, 430 U.S. at 274.

34 U.S. Auto Parts Network, No. SJC-13283; Brief of the Commissioner of Revenue, filed July 13, 2022, at 11.

35 It always struck me as odd that so many states were (and are) happy to bite the hands that feed them. The actual tax burden is usually on purchasers; without the assistance of vendors, states had (and have) no practical ability to obtain purchaser use tax compliance.

36 With apologies to Clint Eastwood in The Good, the Bad and the Ugly (1966).

37 This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.

38 South Dakota v. Wayfair Inc., 138 S. Ct. 2080 (2018).

39 Source: Michael Ralston, special policy counsel, Indiana Department of Revenue (2022).

40 Senate Enrolled Act 2(ss), P.L. 180-2022(ss).

41 See Harley T. Duncan and Sarah L. McGahan, “Locally Administered Sales and Accommodations Taxes: Do They Comport With Wayfair?” State Tax Research Institute (July 2022).

43 The South Dakota statute required the collection of sales tax.

44 See City of Chicago Information Bulletin, issued January 22, 2021, providing guidance on the nexus requirement and establishing an economic nexus safe harbor for the personal property lease transaction tax and amusement tax.

45 The Court found that the South Dakota tax system included features that were designed to prevent undue burden on interstate commerce. Specifically, the statute had a safe harbor for those who transacted limited business in the state. Second, the act could not be applied retroactively. Third, the adoption of the Streamlined Sales and Use Tax Agreement reduced compliance and administrative costs, provided uniform definitions, and created a simplified tax rate structure. Wayfair, 138 S. Ct. at 2099.

48 Cal. Rev. & Tax. Code section 6203(c)(4)(A).

49 Jared Walczak and Janelle Cammenga, “State Sales Taxes in the Post-Wayfair Era,” Tax Foundation (Dec. 2019).

50 GAO-22-106016.

51 TAM 2022-01.

52 Cal. Rev. & Tax. Code section 25135(a).

END FOOTNOTES

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