If you're a remote seller these days, you may still be wondering just exactly how the South Dakota v. Wayfair1 decision has affected you. You may even be wondering if you are, in fact, a remote seller at all. "Remote" obviously being a key phrase here because one very important fact seems to have been lost in the Wayfair shuffle—the Wayfair decision does not just impact online sellers.
Somehow, in the media buzz and legislative saga, remote (or out-of-state) sellers became synonymous with "online" sellers throughout the proceedings. President Trump's tax feud with online retailer Amazon also helped to put an internet stamp on the entire debate. But remote sellers also cover a vast landscape of businesses outside the realm of the world wide web.
While 34 states have now provided businesses with "post-Wayfair" guidance related to new economic or virtual nexus rules, there are still some significant challenges for businesses to address. For example, if your business deals with any of the following transactions, you may be struggling to determine whether the economic or virtual nexus rules even apply and, if so, how:
- Drop Shipments
- Intercompany transactions
- Offshore sellers selling into U.S. (no physical presence in the U.S.)
- Software as a Service (SAAS) and/or software license agreement (SLA)
- Services (e.g., information services)
- Wholesales (most thresholds relate to gross sales, not just taxable sales)
If any of the above describes your business transactions, you will need to do the following:
- Clarify and define these transactions at the jurisdiction level
- Determine whether Wayfair nexus rules are applicable
- Be cognizant of sales dollar and transaction volume activity
- Consider your jurisdictions and whether there are prior period obligations and/or effective dates
- Be prepared to track which jurisdiction has the strongest claim on any tax due
- Decide which jurisdiction has priority: where the service is performed, or where the service is received (if both states tax the service provided, they could both attempt to tax the transaction)
While in the past you were only responsible for collection in the jurisdictions where you had a physical presence, you will now be required to monitor several states where you have sales to track if you hit the economic threshold set by those states. Once you have identified your current state nexus profile, you may need even further guidance because several transactions from the above list might not be specifically referenced by certain taxing authorities.
Will South Dakota Be Your Guide?
It's important to remember that, as the Wayfair ruling met with more resistance from Supreme Court Justices than many anticipated (see A Court Divided), the 5-4 majority that eventually overturned Quill Corp. v. North Dakota2 (the previous nexus threshold for how states could tax sales) also left behind a fair amount of grey area. The Court stopped short of upholding South Dakota's law as being constitutional, but it did give several reasons why the state's law and its tax compliance system in general would not be a burden on interstate commerce. This brought into question whether Congress needed to intervene at all, a question the Wayfair Justices raised but could not fully answer.
The Court strongly suggested that a law that follows "the Wayfair checklist" would pass constitutional muster. States can satisfy this checklist by adopting a de minimis threshold, explicitly rejecting retroactive enforcement, and adhering to uniformity and simplification rules in the Streamlined Sales and Use Tax Agreement (SSUTA). The catch is, because the Court didn't officially rule on the validity of South Dakota's law, it opened the flood gates for potential enactment of economic nexus standards for state and local jurisdictions.
The attractions of South Dakota's law - an economic nexus threshold of $100,000 in annual sales or 200 annual transactions, the rejection of retroactive enforcement and membership in the SSUTA — are certainly a good start towards a consistent approach. But without a uniform federal law in place, dozens of states are passing their own customized versions of the law or enforcing existing nexus laws and rules they already have on the books.
Some people, including Rep. Bob Gibbs (R-Ohio) and Rep. James Sensenbrenner (R-Wisconsin), think the Wayfair decision could open the door to a complex web of state and local sales taxes that would be impossible for small businesses to navigate. Gibbs feels that having to comply with a "needlessly convoluted tax structure" will raise prices for consumers.
Will Congress Intervene?
In the aftermath of U.S. mid-term elections and the ensuing political turmoil, it seems unlikely that Congress will take action within a reasonable time frame to make a meaningful impact. However, many feel that without the mandate of a federal bill, it will be impossible to impose standards of uniformity and simplicity on states to help remote sellers cope with the new tax collection obligations being thrust upon them.
Enter the Protecting Businesses from Burdensome Compliance Cost Act, introduced by Rep. Gibbs, and the Online Sales Simplicity and Small Business Relief Act of 2018, introduced by Rep. Sensenbrenner. Each are designed to ease the burden for out-of-state vendors working to comply with sales and use taxes in other states, and each were introduced into Congress in September 2018, kicking off the first stage of the legislative process.
Remote sellers need to be aware of the provisions being proposed in these two new bills, which include:
- Legislation would establish a start date — not prior to January 1, 2019 — for states to require collection and remittance of sales tax by out-of-state sellers.
- States cannot retroactively collect sales tax for previous interstate sales where no nexus existed.
- States that want to collect sales tax from out-of0state vendors who do not have a nexus, must enact legislation that:
- Provides a statewide uniform tax rate that cannot be higher than the highest combined rate of all local and state taxes
- Permits out-of-state vendors to remit sales taxes to one location
- Provides a statewide uniform provision for what is taxable
- Vendors that have nexus operate as they currently do.
- Establish a small business exemption, meaning a remote seller with gross annual receipts below $10 million in the U.S. isn't required to collect and remit sales tax.
Yes, the two bills are meant to set guidelines for states seeking to expand their sales tax to out-of-state sellers for which no physical nexus exists. But they also serve to clarify items that were not specifically addressed in the Wayfair decision. Rep. Sensenbrenner said remote sellers and consumers should expect action on a bill "definitely" before 2019. He feels "very confident" that it will be considered in the House before the end of the year. If he is right, it would be the first time such a bill would receive consideration in either chamber since 2013.
Not everyone is convinced, however, that Congress has the solution, and many are concerned over what they perceive as unanswered questions in each bill—and the potential for future lawsuits. The National Conference of State Legislatures (NCSL), for example, has urged Congress not to advance federal proposals that seek to limit and delay the Wayfair decision and the implementation of state economic nexus laws.
But it's easy to see why representatives from Congress would start to come forward with proposed fixes for the current tax melee in the wake of Wayfair. No doubt they are receiving urgent input from local businesses that could be severely impacted by the ruling. While each proposed bill seeks to reduce the administrative burden of new tax structure by implementing the above fixes, the future for businesses still feels as murky as when the Wayfair journey began (see Playing Catch Up).
To emphasize the prevention of far-too-soon implementation dates, Rep. Sensenbrenner said if his bill is enacted, states that began collecting sales tax before Jan. 1, 2019 would have to refund the sales tax to the seller, who would then have to refund the tax to the purchaser or face potential legal battles. Of the 34 states that have enacted an economic nexus model, 26 currently have set implementation dates before Jan. 1, 2019.
What You Need to Consider
Both bills are in the first stage of the legislative process and will then typically be considered by committee next before they are possibly sent on to the House or Senate. While they both attempt to balance the rights of states to collect tax on remote sellers while protecting consumers and small businesses from facing an undue burden, it is by no means a given that either will pass.
If Congress is not able to agree upon a bill prescribing order in a post-Wayfair world, will individual states continue to bend and shape their state and local tax rules as they relate to remote sellers? How would that impact the cost effectiveness and efficiency of your business, online or otherwise? Until these questions are answered, there are things you'll still need to keep diligent watch over, including:
- Whether or not there will be additional challenges beyond the South Dakota law, given that states statutes are not all equal
- Impact of Wayfair on your overall business organization:
- Tax decisions related to taxability and sourcing
- Potential financial impact to nexus footprint
- Additional tools and related costs for compliance
- Monitor overall business implications
- Overall risk management and accounting for business decisions
- Post Wayfair impact on other taxes and financial reporting (are your reserves adequate?)
1. South Dakota v. Wayfair, Inc., U.S. S. Ct. Dkt No. 17–494, 6/21/2018
2. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
Originally published November 20, 2018
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.