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Sunday, October 14, 2018

More on Wayfair

There have been many articles on the June 2018 US Supreme Court's decision in South Dakota v Wayfair. But, that's not surprising given the decision overrode 51 years of state tax precedence!  I've written two article (so far) and a few blog posts.

One post (8/3/18) was on SalesTaxSupport.com where I asked the question - what if the parties were not billion dollar vendors? I think it is too bad the vendors in the case were so large. After the case, Wayfair issued a press release noting that it was already collecting tax on 80% of sales with that figure growing as its logistics footprint grows (that is, it was setting up distribution or other operations in more states).**

Wayfair's 2017 10-K also indicates it has over 1,300 engineers and data scientists! Well, that makes it a lot easier to create a logistics system to collect sales tax from all customers and remit it to the state. What about a vendor who sold 200 $1 items to customers in the state?

Additional examples of small vendors I came across recently in doing research on taxes and crowdfunding are small vendors raising money on crowdfunding sites such as Kickstarter. In fact, I gave $30 to a party trying to raise funds to create and distribute calendars. And they are not alone. There are similar sites where someone is trying to raise funds to create a comic book, artwork and more calendars. If the party I gave the money to hits his target (and he did), I'll be sent a printed calendar. The party says they will ship to anywhere in the world. Well, 200 or more of these sales in a state will create sales tax collection costs too in a growing number of states, despite being what appears to be a small vendor. Hitting that figure is more likely in high population states such as California.

I see that some of the sellers of calendars and comic books are providing a pdf of the item. While that is not taxable in all states, the seller needs to check the law in each state to be sure and for states that find sales tax nexus with 200 or more transactions in the state, whether that figure includes taxable and non-taxable transactions in that count.

Some states and likely more will enact legislation making the "marketplace facilitator" such as Etsy and eBay collect tax.  I think Kickstarter and other crowdfunding sites will likely fall under this definition, but states should be sure (see Pennsylvania's definition here). Unlike eBay and Etsy, Kickstarter does more than help people sell products. Also, the funders might be providing more than needed to receive the product. That raises more issues on the sales tax collection side. Also, when must the sales tax be remitted because on many sites, the party doesn't get the funds if their target is not met, or they might get the funds, but never deliver the product.

What do you think?

**Here is the blog post originally posted on SalesTaxSupport on 8/3/18

Wayfair - What If the Respondents Were NOT Billion Dollar Sellers?


The U.S. Supreme Court's ruling in South Dakota v. Wayfair, Inc., et al, on June 21, 2018 is a landmark one, overturning 51 years of precedent to find that physical presence is not the appropriate standard for nexus. I won't go into the details as much has been written about the case (for example, do a search for "Wayfair" on SalesTaxSupport.com).
South Dakota's law change in 2016 (SB 106) provided that a vendor had sales tax collection obligations if it had over $100,000 of gross revenue into the state or 200 or more transactions in the previous calendar year or the current calendar year. South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SSUTA) so provides software and other resources to help vendors comply.
The Court found that the "economic and virtual contacts respondents have with" SD were sufficient for nexus. SD law also included features "designed to prevent discrimination against or undue burdens upon interstate commerce." The three features:
1.       A small vendor safe harbor (the $100,000 of sales or 200 or more transactions in 12 months threshold);
2.       The law does not apply retroactively; and
3.       As an adopter of the SSUTA, SD law has features that "reduce administrative and compliance costs" such as uniform definitions, and access to software with audit protection for using it.

One of the aspects of the case that I find interesting is the size of the three plaintiffs. Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., all have sales over $1 billion per year. The first two are publicly traded companies (links are to their recent 10-K reports and for Newegg, to a 2009 S-1 report). If you don't know the background of these companies, I encourage you to look at the 10-Ks (see links) of Wayfair and Overstock.com. It really hits you that these are really tech companies, using the technology to create unique shopping experiences - 21st century retailers. The co-founders of Wayfair are engineers who "created a company culture deeply rooted in technolgoy and data." Wayfair has a "team of over 1,300 engineers and data scientists" in their workforce! That is out of 7,751 full-time equivalent employees (per the 2017 10-K report).
Certainly, based on size and technical expertise and ability to navigate many laws including those of the SEC, these respondents will have no problem collecting sales tax. Wayfair has already indicated such in a 6/21 press release where it says it already handles sales tax on about 80% of U.S. orders. They "do not expect today's decision to have any noticeable impact on our business, as it may on other retailers who do not currently collect and remit sales tax." On 6/28, Overstock.com stated that its decision to voluntarily collect in all tax jurisdictions has not led to any noticable sales decline.
Would a small remote vendor selling 200 or more $5 items into South Dakota be able to make the same claims? That is - no problem collecting? I don't think so.
What if instead of three very large retailers, the respondents were vendors who barely crossed the SD safe harbor thresholds? Would the Court have taken a different perspective?
Of course, the Court did remand the case to the SD Supreme Court, but the respondents remain the same.
While over $100,000 of sales into a state is arguably a good indicator of a company large enough to handle sales tax collection, the 200 or more transactions is not. Is the number of transactions safe harbor even needed? Why not just use gross receipts? Yes, a company might sell a single item costing $90,000, but the state has other ways to handle such transactions. Such a sale would likely be to a business and the business buyer could be required to self-assess the sales tax on the spot. If it was an individual buyer, chances are good it was a car, boat or plane that needs to be registered and sales/use tax can be collected then. If it were artwork, jewelry or clothing, alternatives would be needed, but doable.
Many states are following the SD approach. I suspect that we'll see near future litigation with a small vendor challenging the existence of substantial nexus based on 200 transactions in a year of nominal value each.

What do you think?

3 comments:

Alex said...

Wayfair is not indicative of the broad e-commerce market. They sell large, expensive pieces of furniture.Furthermore, you can argue that a large part of the cost is domestic shipping.

A company selling a lightweight item or a PDF (as you mention) is a totally different case.

From my perch it appears that most (maybe 70%) e-commerce sales are now collecting sales tax.

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