South Dakota's recent Wayfair settlement has eliminated an opportunity to provide further guidance for other states' remote seller laws, tax experts said.
The U.S. Supreme Court's decision in South Dakota v. Wayfair Inc. “didn’t give us a new rule”; instead, it simply overturned the requirement that state sales tax be collected only from sellers that are physically present in a state, said Lindsay McAfee of KPMG LLP. The rest of the law’s legality was to be examined by the South Dakota high court, but “we didn’t get to learn anything new” because of the settlement agreement between the parties, she added.
McAfee's comments came during a November 8 panel discussion at the 2018 California Tax Bar and California Tax Policy Conference in San Jose. She said the situation is doubly frustrating since the Court “all but said South Dakota’s law is good, [it] just didn’t say it."
The overturning of Quill Corp. v. North Dakota's physical presence requirement occurred in the context of South Dakota’s approach to remote sales taxation: the state's membership in the Streamlined Sales and Use Tax Agreement, the law's lack of retroactive application, and the provision of free software to help sellers comply with the collection obligation. Although the Court praised those features of the state’s remote sales tax regime, the result is that the opinion “doesn’t give us a whole lot of insight as to what a non-SSUTA state could or would be able to get away with,” McAfee said.
Panelists said they expect that future legal battles will explore the extent to which states' tax rules can burden remote sellers before courts decide they’re unconstitutionally impeding interstate commerce.
Although the South Dakota case is now off the table, “I think we’re waiting with bated breath to see what happens in Colorado,” McAfee said. “As many of you probably know, there are many home-rule jurisdictions in Colorado [that] essentially operate their own little kingdom of sales and use tax, and they are very aggressive, and a lot of people are waiting to see what they will do."
The panelists speculated that Colorado will end up in litigation that could clarify the limits on jurisdictions’ taxing authority under Wayfair.
Randy Ferris of EY noted that the sales threshold levels that states use to assert a remote seller’s economic nexus and require it to collect tax could also be a point of contention. Although most states have copied or exceeded South Dakota’s threshold of $100,000 in annual sales, or 200 or more sales transactions, into the state, it’s not clear what thresholds might be sustained or struck down by courts. During oral arguments in Wayfair, the argument was presented that one sale into a state could theoretically be enough to prove nexus, but “the court skirted around that, [and] we didn’t get any answer,” according to Maria Huseinbhai of the California Franchise Tax Board.
“The lower the threshold . . . the more likely it becomes that you’re going to find a court that’s going to say that an undue burden is being imposed on the small remote seller,” Ferris said, arguing that "Pike balancing" will be the new test for gauging the constitutionality of states’ sales tax regimes.
“The multi-factor balancing test in [Pike v. Bruce Church Inc.] is, ‘Is the burden that’s being imposed . . . clearly excessive in relationship to the putative local benefits?’” Ferris said. A state with low thresholds — “especially if you’re a state that doesn’t offer free software” to ease sellers’ compliance — might see courts decide that its remote sales tax compliance rules fall so heavily on small sellers that they violate the commerce clause, he added.
Other questions also remain, panelists said. For example, it’s not clear how Wayfair affects local governments. The opinion “never really ever addresses the issue of what a subdivision of the state’s authority is to impose [tax collection compliance] requirements on a retailer” that has substantial nexus at the state level, according to Bradley Heller of the California Department of Tax and Fee Administration.
Ferris noted that under California sales tax law, “it’s very clear that the county is the taxing authority, not the state,” meaning that it’s possible a county will have to independently establish that a seller has substantial nexus within its taxing jurisdiction.
Panelists also noted the Court’s reference to “virtual contacts” as helping to establish a seller’s substantial nexus with a state. “They’re saying sufficient nexus is created by these economic and virtual connections, but the Court didn’t really define what that means,” Huseinbhai said. Wayfair provided examples such as “the cookies that are stored on hard drives, an app downloaded on a cell phone, and leasing data storage, but they didn’t provide us with a solid, bright-line definition or test,” she said.
Fred Marcus with Horwood Marcus & Berk Chtd. said that shows an acknowledgment by the Court that the economy has changed since Quill was decided, and that the inability to tax online commerce has been hurting state governments. “I still think [the justices] would have liked to have Congress step in and take some action, but Congress hasn’t, so the Court took it upon itself to take the action they had expected Congress to take” when they decided Quill, he said.