U.S. Supreme Court Overturns Quill
David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Worldwide Tax Daily. This week, goodbye Quill, hello Wayfair. On June 21st, the Supreme Court handed down a major decision in South Dakota v. Wayfair. In its 5-4 ruling, the court abandoned the physical presence test that it had reaffirmed in 1992's Quill Corp v. North Dakota. The test limits states’ ability to force online retailers to collect and remit sales tax on goods sold to customers in their state. Here to break down the ruling, its effects, and the complications it may bring, is State Tax Today legal reporter Jad Chamseddine. Jad, welcome back to the podcast.
Jad Chamseddine: Thanks for having me.
David Stewart: Historically, companies like Wayfair didn't have to collect and remit sales taxes, but do they now after the court's ruling?
Jad Chamseddine: Technically speaking, yes. As practitioners and tax departments continue to mull over the ruling, the Supreme Court appears to have blessed South Dakota's statute requiring retailers with at least $100,000 in sales into the state or 200 transactions a year to collect and remit sales taxes because of their virtual presence and the fact the vendor avails itself of the substantial privilege of carrying on business in the state.
David Stewart: This sounds like a pretty big victory for the states. Does it mean that they can tax any sales into their jurisdiction?
Jad Chamseddine: It certainly is a big victory for states, but the court also appears to have created an outline for states to gain compliance, which will surely be litigated for years and give state tax attorneys more work.
David Stewart: What is this outline?
Jad Chamseddine: In blessing South Dakota’s statute, the court appears to highlight three aspects of the statute it liked. 1) It had a reasonable small-seller exemption so that companies with less than $100,000 in sales into South Dakota or 200 transactions don't have to collect and remit sales taxes. 2) The law isn't retroactive, so the state can't go after a retailer for not having collected sales taxes the last year. And 3) South Dakota is part of the Streamlined Sales and Use Tax Agreement.
David Stewart: So I would guess that other states could just do a copy and paste on South Dakota's law and join the Streamlined Sales and Use Tax Agreement? What is that, by the way?
Jad Chamseddine: It's also known as SSUTA, and it was created to simplify and modernize sales and use tax collection and make it less burdensome for in- and out-of-state businesses to collect and remit. It basically allows businesses to send the sales taxes they collect to a single state agency. They also make terms uniform so that a diaper means the same thing in every state.
David Stewart: Well, I guess that could address something that I found very interesting in the dissent. Chief Justice Roberts talked about how complicated sales taxes are by noting that in Illinois a Twix is considered a food, while Snickers is considered a candy.
Jad Chamseddine: Yes, that's correct, because Twix has flour in it. And that's exactly what SSUTA does. They sit around for hours discussing terms and come to some sort of agreement. There's also input from the business community through the Council On State Taxation and companies that create software dealing with those sales taxes. They usually meet physically twice a year and they vote on these issues.
David Stewart: Are all states with sales taxes members of SSUTA?
Jad Chamseddine: No, they currently only have 23 members. That also doesn't include some of the biggest states like California, New York, Texas, Florida. Most of their members are located in the Midwest and central parts of the country, which has been a big criticism of the agreement since it only applies to about 30 percent of the country's population.
David Stewart: So the Supreme Court seems to have made a big deal about South Dakota being a member of this group. Will that push other states to join?
Jad Chamseddine: It is unlikely that every state will and can join. But practitioners and tax experts expect states to simplify their tax codes and sales tax remittance process, as well as indemnify companies that use tax software from litigation, which is what SSUTA does. If you use a company which, are called certified service providers, and they somehow mess up a local tax, the state can't go after the vendor in an audit. Just how much in compliance a state will have to be remains to be seen, and surely will be subject to some lawsuits over time.
David Stewart: The court doesn't seem to have put forward a very straightforward test. It seems more to be saying, we like what South Dakota did here. Is there potential for a lot more litigation as we figure this out?
Jad Chamseddine: Yes, lawyers see a lot of pitfalls here. What does $100,000 in sales to South Dakota or 200 transactions mean for other states? Can you compare a state with less than 1 million people with California? Would California be able to employ the same figures to tax out-of-state retailers, or would their statute need to have higher figures? Lawyers certainly see litigation occurring there. Then there's also the question of retroactivity. The Supreme Court mentioned that it liked that the South Dakota statute doesn't tax retroactively, and it seems to suggest that all states should have that. Taxing retroactively will create problems for states, and many have said they won't apply to past transactions. Several states, like Indiana for instance, which passed a similar statute as South Dakota, did so last year and they put businesses on notice. They technically could go back to 2017 and require companies to remit the sale taxes.
David Stewart: So are other states now rushing to pass their own similar statutes?
Jad Chamseddine: Perhaps not rushing, but states are certainly thinking about how to proceed. After all, most states are out of session and bringing them back means it will cost taxpayers money to pass a law that will cost taxpayers money in an election year, so they're proceeding cautiously. They also need retailers to register with them and sort out any kinks and problems that they may have with software and other issues. Also, 31 states already have legislation that taxes online sales in one way or another, often through some sort of internet-related nexus like New York-style click-through and Massachusetts-style cookie nexus. This South Dakota law would be easier for states to manage and could prevent them from getting sued. But it is now up to the individual states to implement rules and laws to tax online sales. And they will have to figure out where they're going to set the boundaries and the thresholds. It was expected that the court won't set monetary thresholds, which was why this would have been better decided by Congress, which is what the dissent said. But it appears that streamlined agreement states do have a jumpstart to being in compliance with the Supreme Court standard, but it won't immunize them from lawsuits.
David Stewart: You mentioned a role for the U.S. Congress in this. Is there still a way for them to step in and set rules?
Jad Chamseddine: Congress will always have a role to play when it comes to regulating interstate commerce, but the incentives now have changed.
David Stewart: How so?
Jad Chamseddine: Well, states for years wanted Congress to act. After all, getting your case to the Supreme Court is extremely hard. And when you have 45 states pushing for the same thing, it may be easier to get Congress to act, one might think. They almost succeeded in 2013 by passing a bill in the Senate by a healthy majority to force retailers like Amazon to collect and remit sales taxes. But House Judiciary Chair Bob Goodlatte of Virginia stopped the bill from being introduced in the House Judiciary Committee.
David Stewart: So I take it now the dynamic has changed and the states will be less interested in congressional action.
Jad Chamseddine: Exactly. They won. If they tread carefully and aren't irresponsible in the way they tax and regulate, it is unlikely that their allies in Congress will feel compelled to step in. Considering that this is an election year and that no one wants to be pushing legislation taxing people, it is unlikely that we will see anything happen in Congress this year. And probably not for a long time after that, depending on how much litigation we see play out. States are also unwilling to push legislation curbing their own authority to tax, especially when it comes to setting a monetary threshold, which could drop depending on how the state is doing financially. And then there's also the issue of getting the bill signed by the president.
David Stewart: Has President Trump indicated that he wouldn't sign such a bill?
Jad Chamseddine: Not really, but he did tweet hailing South Dakota's victory. Remember that this issue has divided parties and created interesting bedfellows. The biggest champions of South Dakota's quest have been Senator Heidi Heitkamp of North Dakota, a Democrat, and Senator Mike Enzi, a Republican from Wyoming.
David Stewart: Fascinating. I'm sure there'll be a lot more to say about this in the coming months, but we'll have to leave it there for now. Jad, where can listeners find you online?
Jad Chamseddine: On Twitter @jchamseddine10, that's J-C-H-A-M-S-E-D-D-I-N-E-10.
David Stewart: Thank you for being here. And now, Coming Attractions. Each week we preview commentary that will be appearing in the next issue of the Tax Notes magazines. We're joined by executive editor for commentary, Jasper Smith. Jasper, what will you have for us?
Jasper Smith: In Tax Notes, Professor Daniel Shaviro examines the Tax Cuts and Jobs Act's treatment of multinational corporations through international provisions, arguing that the worldwide versus territorial dichotomy is outdated. Also, John Cunningham explores the principal asset rule under Section 199A and suggests how it should be defined under coming guidance.
In State Tax Notes, Bruce Nelson discusses Colorado's recent switch from cost-of-performance to market-based sourcing for sales of services. And Timothy Noonan considers New York's renewed sales and use tax enforcement efforts on artwork and luxury goods.
And in Tax Notes International, Roberto Romito discusses measures in Italy's 2018 budget law that could result in a higher capital gains tax burden for foreign companies, and offers suggestions to companies affected by the change. Further, Seun Adu discusses Nigeria's auditing of transfer mispricing.
David Stewart: Excellent, you can read all that and a lot more in the June 25th editions of Tax Notes, Tax Notes International, and State Tax Notes. That's it for this week. You can follow me on Twitter @TaxStew, that's S-T-E-W. If you have any comments, questions, or suggestions for a future episode, you can email us at email@example.com. Be sure to subscribe to us on iTunes or Google Play to make sure you get the next episode of Tax Notes Talk.
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