Following the Wayfair v. South Dakota Supreme Court ruling on June 21, 2018, retailers with a large ecommerce channel and digital native brands have been up in arms about the tax implications and increased burden on their business.
Tax collection, calculation and remittance are inherently complex topics. To get our audience the most accurate information possible on:
- The ruling
- What it means
- What will happen next
- What you should do next
I sat down for an hour-long interview early Friday morning following the ruling to talk to Avalara’s Vice President of Government Affairs and U.S. Tax Policy, Scott Peterson.
Peterson manages all tax affairs for sales tax automation experts at Avalara. Prior to Avalara, Peterson was the Executive Director of the Streamlined Sales Tax Governing Board, a board which was cited in the recent Supreme Court ruling on Wayfair v. South Dakota.
Peterson also served nearly 11 years as the Sales Tax Director of the South Dakota Department of Revenue.
As one of the foremost experts on case and its impact, I asked Scott to share his perspective on what retailers need to know, what changes now and what to expect moving forward to ensure their business doesn’t falter as a result of any new laws.
On Thursday, June 21, the United States Supreme Court issued its opinion in the case South Dakota versus Wayfair et al.
In a five-to-four vote, the court ruled that the standard that’s been in place since 1967 is an inappropriate standard for today.
That previous standard was physical presence.
The rule that states have lived under, and the rule that retailers have been able to live under, is that no state could force a seller to collect that state’s sales tax unless that seller had a physical presence inside the state.
Nexus may not even be the right word. Nexus literally just means connection.
But I’m glad you used that word because that is where the Justices want the states and businesses to go.
They want to focus more on the concept of a connection and less on the concept of physical as a defining factor of connection.
What they said in the case was that the way the states have interpreted their previous opinions, two opinions, National Bellas Hess versus Illinois in 1967, and Quill versus North Dakota in 1992, is that physical presence is the bright line.
If you have physical presence, you must collect. If you don’t have physical presence, you don’t have to collect.
But there are other examples, many of which were given in the case, where there’s a connection between a seller and a state even without a physical one. Those examples have created unusual tax outcomes.
This ruling will require any business to collect South Dakota sales tax who sells more than $100,000 or has more than 200 different transactions to South Dakota residents.
The connection here is sales volume.
Of course, since 1992 the states have gotten extraordinarily creative in their ways of defining a connection. This volume example is just the most recent.
For instance, there’s a law in half a dozen states that says if you make a sale to the state – i.e. if you’re selling computers to the Department of Revenue in North Carolina – that act and that act alone requires you to get a sales tax license and collect sales tax for every other computer you sell to anybody else in North Carolina.
Laws like that make having a connection more and more difficult to avoid. And the business community took notice.
There were some 60 amicus briefs submitted for this case, and all of them pointed out the arbitrary feeling of each state’s particular laws. And some states really have been adding to a business’s burden.
For example, two years ago, the Federal Court System including the United States Supreme Court let stand a Colorado law that gives the state of Colorado the right to force sellers who don’t collect the Colorado sales tax to send a report to the Colorado Department of Revenue with a list of every one of their customers and the total amount that they purchased in the last calendar year.
Well, the states’ reason is uniform throughout the country: get more retailers to collect the sales tax.
The ideas that have come up – for example in Colorado or North Carolina, or now South Dakota – are just state-specific ideas.
But in this business, once one state is successful with an idea, other states adopt it.
That’s the deal. North Carolina was the first state to think of tying sales tax collection to making sales to the state, and within the next three years half a dozen states are doing the same thing.
That’s the way the process has worked to date, and it has led us to today, where it’s hard to know where to do business in this country and collect sales tax or not have to collect sales tax without having an accountant who creates a map of the United States with all the different laws, and matches that to where you do business. The net result is a high-level of complexity and compliance requirements on businesses.
That’s where technology can help, though. Did the judges include technology commentary in their ruling?
They did indeed.
- In the government briefs, technology was mentioned consistently as part of the proposed solution.
- In response to oral arguments on April 17, one or two of the Justices mentioned it.
- In the opinion on June 21, the judges mentioned the steps South Dakota has taken to simplify its sales tax. One of the things mentioned was being a member of the Streamlined Sales Tax and paying software companies to provide automation to retailers.
A couple of judges went on several times about how the internet has changed everything.
They said that the technology that created the ability to be a $5,000,000 company out of your basement also created the technology to be able to comply with tax laws.
Yes. The distinction is that, if you had a scalable business that requires you to have an employee in every state, you would have had to have done this a long time ago.
The thing that the Justices hit on in this decision:
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That the current standard, physical presence, created a scenario where the world’s smallest business would have to collect sales tax everywhere because they have an employee in every state.
And the world’s largest business wouldn’t have to collect sales tax anywhere, because they didn’t have any employees except in one state.
In general, the ruling was that the world has changed. Physical presence isn’t the only connection – or nexus – needed for sales tax collection because physical presence isn’t the only way we connect.
Ultimately, the Supreme Court redefined nexus. Do the states now get to define their own connections – and implement them accordingly?
I think that’s true. The challenge for a state is how far can they deviate from what the Supreme Court approved.
In South Dakota, it’s $100,000 in sales. It might be a real stretch to go down to $5,000.
In fact, that’s one of the things that the Justices commented: that $100,000 threshold in South Dakota. For a very small business or start-up, the nexus point likely won’t apply.
Folks have been talking about the Commerce Clause in relation to these rulings. What do you make of that?
The Commerce Clause gives Congress the ability to alter this decision if it comes to that.
Early on in our country’s history, the Supreme Court determined that the Commerce Clause in our United States Constitution gave Congress the authority to regulate things like interstate commerce.
They’ve done so very sporadically, in most cases extremely focused, and haven’t done it very often. When they do it, it usually lasts for 75 years and it becomes painfully out of date before they get around to changing it again.
The last big example was in 1998 in the Internet Tax Freedom Act.
Congress adopted the Internet Tax Freedom Act and it did a couple things.
- The first thing is it prohibited states from treating electronic commerce differently than non-electronic commerce. That was a good idea. There wasn’t much talk about states from doing that, but nonetheless, it was still a good idea.
- The other thing they did was prohibit states from taxing internet access. Maybe that was a good idea, maybe it wasn’t.
Discriminating against electronic commerce versus non-electronic commerce is a pretty easy commerce kind of decision, but most of us get our internet access from someone that’s local. It’s pretty easy to find an example of internet access that is not interstate commerce.
So, there’s a lot of people that think that Congress stepped over their authority when they prohibited states from taxing internet access.
Either way, Congress doesn’t use the commerce clause very often anymore. But in theory, they can regulate any connection between states that generate revenue.
The problem Congress faces with the Commerce Clause is that to use it, they must define:
- What is commerce?
- What is ‘between’ states?
A good example here is the legal drinking age.
That is a federal law, except it’s not a federal law that mandates the 21-year-old drinking age.
It’s a federal law that takes highway transportation funding away from states that don’t have a 21-year-old drinking age.
That’s how Congress has regulated interstate commerce.
Congress can regulate intrastate activity, things that only occur inside of a state, only through their power of the purse.
Well, assuming some state doesn’t make a highly burdened sales tax law, then Congress will not step in. Congress will not fix this.
Every state will adopt a law that’s identical to South Dakota law, and that’ll be it. And it’ll all be done within 13 months.
Well, the first thing I’ve been telling people is just to take a deep breath. Nothing is changing right away. These things take time.
Second, call your accountant.
Ask your accountant what these laws mean, and where these laws exist.
Then, stop thinking about where you have people and property, and start thinking about where you have sales.
Retailers need to think about where they sell, not just where they are.
Create a map of the United States that’s attached to a spreadsheet that shows how much in sales you have per state.
Say you have $25,000 in sales in Iowa and $40,000 in sales in Colorado.
Just keep an eye on where your sales are and how they’re doing. Look at last year’s numbers and determine where you’ve exceeded the threshold.
Had these new thresholds been in effect last year, where would you have exceeded them?
Then figure out a plan to deal with this year and the future.