US Supreme Court Brings BIG News for Sales Tax - Wayfair Decision

In a 5-4 decision, the U.S. Supreme Court ruled on 6/21/18 in South Dakota v. Wayfair, et al that the 1992 Quill decision is "unsound and incorrect"! This is big news and will affect thousands of medium to small vendors selling goods (and sometimes services) to customers in states where the seller is not physically present. [the "et al" are Newegg and Overstock.com]

In 1992, the Quill decision was significant as the Court ruled that for sale tax nexus, physical presence is not needed under the Due Process clause, but is needed under the Commerce Clause. Under the Due Process clause of the 14th Amendment, the question is whether it is fair for a state to impose its laws on someone. Where sellers are purposefully making a market or reaching out to customers in a state, they can be subject to that state's laws even without physical presence.

But for Commerce Clause purposes, the 1992 Court was concerned that with over 9,000 state and local jurisdictions able to assess sales/use tax with varying rules, definitions and procedures, making non-present vendors collect would impede interstate commerce.  Congress though, controls the Commerce clause and the Court noted that Congress could provide a different rule if it desired.

States, eager to be able to get sellers to collect sales tax rather than trying to get in-state consumers to self-assess and pay a use tax which most people have no clue about, wanted Congress to allow them to go after non-present vendors.  Usually, the federal proposals, dating back to 1994, include a de minimis seller exception, such as for vendors with no more than $1 million of sales.

The majority in Wayfair found that Quill was not the correct approach. So, what is the proper standard? Well, the law before the Court was South Dakota's law enacted in 2016 to challenge the Quill decision. That law (SB 106) provides that a seller has sales tax nexus if it has either over $100,000 of sales of goods or services into the state or 200 or more transactions. SB 106 also specified that it would not apply retroactively.

The majority found Quill "flawed" in that physical presence is not the requisite interpretation of the nexus requirements laid out by the Court in 1977 in Complete Auto Transit. They also found that Quill "creates rather than resolves market distortions" and created a "tax shelter" for remote vendors.

I interpret that as the Court realizing that perhaps physical presence was not the appropriate standard to determine nexus. It does present an oddity that a small vendor with 2 items of inventory in a state could have sales tax nexus while a very large company selling items costing lots of money (so a large company likely with a tax department) would not have to collect sales tax if it had no physical presence in the state despite having a significant economic presence in the state.

The dissent basically took the approach that Quill has worked and not impeded commerce or sales tax collection. Per the dissenters, "states and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical presence rule."

Will this hurt small sellers such as those who sell via eBay or Etsy? Probably not. States will have to enact economic nexus rules, likely similar to that of South Dakota which the Court just upheld. Or, perhaps state tax agencies can enact regulations to allow economic nexus for sales tax. This all also depends on existing law in the state and how broadly (or narrowly) it might already be written.  While over $100,000 of taxable sales into the state is significant, 200 or more transactions is not. That is a problem. Making a seller who sells 200 $5 items into a state have to deal with that state's sales tax procedures will be costly for that seller.  I think a sales volume approach is better than a number of items approach.

Also, South Dakota is part of the Streamlined Sales and Use Tax Project so offers free software to vendors to ease collection. That is a good idea for states to do as well. I don't think all states need to join the SSUTA, but providing low-cost tools to aid sales tax compliance is a good idea.

In May, both Iowa (SB 2417) and Illinois (HB 3342; A 100-0587) enacted laws similar to those of South Dakota. I expect other states will do the same.

And, perhaps Congress will step in under its commerce clause authority and provide some limitations on what the states can do. Perhaps they will act quickly.  In 1959, following a Supreme Court ruling in Northwestern Cement v. Minn., 358 US 450 (1959) that Congress thought would lead to states harming multistate businesses regarding income taxes, they enacted Public Law 86-272 within 7 months!

Senators Wyden (D-OR) and Shaheen (D-NH) sent a letter to the Small Business Administration on 6/28/18, noting concerns on how states follow the Wayfair decision because it can put a significant burden on small businesses that may have to deal with some portion of the more than 12,000 local jurisdictions that impose sales/use tax. [Senator Sheehan press release of 6/28/18] Senator Tester (D-MT) and others from states with out a sales tax introduced S. 3180, a bill to regulate certain State impositions on interstate commerce.

A bipartisan group of senators and congressmen also filed an amicus brief in Wayfair in favor of the respondents (Wayfair, et al); it included lawmakers from states with and without a sales tax.

One last point - States still need to work to get consumers in the state (both individuals and businesses) to pay their use tax. A law like South Dakota's does not result in sales/use tax being paid on all taxable purchases due to the de minimis threshold and because a state can't easily make non-US vendors collect.

Links: 6/21/18 ruling in Wayfair + 4/17/18 oral argument + links to the 40+ amicus briefs filed.

Updates:

• See post for state reactions (continues to get updated).
• House Judiciary Committee hearing on "ramifications" of the decision to small business and consumers, 7/24/18

What do you think?

Trailing Nexus - Extra Complexity

As if it isn't already difficult enough for a business to know if it has income or sales tax nexus in a state, it might have "trailing nexus."  Of course, if the business has a physical presence, it likely has nexus. It is challenging when a state uses economic nexus or for sales tax, the business has some type of relationship with someone in a state. When a state specifies that a company has nexus for an extra six months (or other time period), that does provide certainty, but is it constitutional? And most states don't talk about it so you really don't know when nexus ends.

I think states can do better although perhaps Congress needs to step in on this one for uniformity.

Here is a post originally posted on SalesTaxSupport (which shut down in 2018).

When a business has temporary or short-term presence in a state, how long does the sales tax nexus last? Assuming the presence was long enough to even create sales tax nexus in the state, how long does it last? Is it only during the time period when there was physical presence? The answer is elusive in many states.

The State of Washington recently issued a reminder on trailing nexus. In Special Notice dated Feb. 2, 2016, with respect to the retail sales tax (per WAC 458-20-193):

"nexus continues for the remainder of that calendar year when one of the following nexus standards is met and the following calendar year. This applies to all taxes reported on the excise tax return, including retail sales tax. The additional calendar year is also known as “trailing nexus.” (RCW 82.04.22)" ..."nexus is based on the business having a physical presence in Washington (RCW 82.04.067(6))."

Per the statute: "(104) Trailing nexus. RCW 82.04.220 provides that for B&O tax purposes a person who stops the business activity that created nexus in Washington continues to have nexus for the remainder of that calendar year, plus one additional calendar year (also known as "trailing nexus"). The department applies the same trailing nexus period for retail sales tax and other taxes reported on the excise tax return."

What is the rationale for extending nexus to the end of the next calendar year? Whatever the business was doing in the state that created nexus, has a lingering effect. For example, a business had sales staff at a trade show and they demonstrated their product and made sales and then left. Some people who saw the demo though decide to buy a few months later. Arguably that sale relates to the company's physical presence in the state. To make is easier for taxpayers and the state, an arbitrary date can be used as the cut-off for nexus. While it might seem more fair for that arbitrary date to be a specified number of months or weeks after the physical presence ends, that raises the complication of determining when the physical presence ended, which might not always be easy. But you can see that if a business ends its physical presence early in the year, it has more days of sales tax nexus than one that ends it on December 30.

In contrast, a California annotation from the Board of Equalization suggests that trailing nexus lasts to the end of the subsequent quarter after physical presence ends (220.0275). But this annotation is not a statute and it ends with this statement showing the uncertainty of truly knowing when nexus ends: "Depending on the facts and circumstances specific to each retailer, the period of trailing nexus may be shorter or longer than the general "quarter-plus-a-quarter" approach."

Is trailing nexus in line with the Quill physical presence nexus rule? It doesn't seem so. A state with a trailing nexus sales tax rule is requiring collection of sales tax by a vendor who has become an out-of-state vendor. But then again, the US Supreme Court did not address whether later sales might be attributed to the earlier physical presence. It is unlikely the Court would have found no nexus for a vendor who enters a state, does extensive solicitation, but tells all potential customers to log onto its website after date X and place orders, knowing that the vendor will have left the state before date X.

I think this is something that Congress should clarify and standardize under its commerce clause jurisdiction. Arguably, it can be made part of the Marketplace Fairness legislation. Of course, with that legislation, the issue is less important as more vendors would have sales tax collection obligations even without a physical presence. But the legislation, such as S. 698 (114th Cong), still includes a definition of remote sales and a trailing nexus sale would not be a remote sale, thus necessitating a definition of trailing nexus.

What do you think?

Trademarks and income tax nexus

A recent West Virginia Supreme Court case involving ConAgra Brands points out that economic nexus is not as broad as some states have argued. The case distinguishes the facts from Geoffrey (South Carolina, 1993) and the more recent KFC (Iowa, 2011). The court also notes that nexus did not exist under Due Process clause which is a reminder that Due Process is important - not all fact patterns should go directly to the commerce clause and Complete Auto Transit for nexus analysis.

I have a short article on this case in the AICPA Tax Insider today - "Trademarks alone are not enough for income tax nexus."

What do you think?