States continue to respond to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, which overturned the physical presence standard for sales and use tax nexus. 1 The case centered on South Dakota’s economic nexus law, which imposes sales and use tax collection and remittance duties on out-of-state sellers making more than $100,000 in sales of goods or services delivered in South Dakota or engaging in 200 or more separate sales of goods or services delivered in the state.
The Court did not explicitly uphold the law at issue, but it determined that sellers having sufficient economic and virtual contacts with a taxing state can establish substantial nexus in the absence of physical presence. The Court cautioned that other Commerce Clause and Due Process concerns could conceivably invalidate the state’s attempts to impose sales tax collection responsibilities on remote sellers, and remanded the case to South Dakota’s high court for consideration of those issues. The Court pointed to three factors that would cut in favor of ultimately upholding South Dakota’s economic nexus law: (1) the law provided sales thresholds; (2) the law was not retroactive; and (3) the state was a member of the Streamlined Sales and Use Tax Agreement (SSUTA). The Court’s decision also raised the possibility that a remote seller’s cookies or apps in a state could establish substantial nexus.
The Wayfair decision, then, is paving the way for states to assert sales and use tax nexus against remote sellers who have an economic presence in a state, but not without limits. As states and their taxing agencies begin to make their positions clear, those asserting economic nexus, without offering the same protections as those cited in the case, can expect challenges from businesses. Unless Congress acts, state and federal courts will be kept busy considering individual states’ standards for many years to come.
When Wayfair was decided, many states already had economic nexus laws in place, some with sales and volume thresholds identical to South Dakota’s. Other states imposed cumbersome notice and reporting requirements for remote sellers, with steep penalties for noncompliance, and offered registration and tax collection as an alternative under economic nexus provisions. Still, other states had economic nexus provisions contingent upon the outcome of Wayfair or enactment of federal enabling legislation. Many states’ laws are tied more broadly to constitutional nexus standards.
A growing number of states assert economic nexus against marketplace facilitators, or impose notice and reporting obligations on them. Pennsylvania law defines a “marketplace facilitator” as a person that facilitates sales of tangible personal property at retail by (a) listing or advertising tangible personal property for sale at retail in any forum, (b) collecting payment from the purchaser (whether directly or indirectly through agreements or arrangements with third parties), and (c) transmitting the payment to the person selling the property.
In the aftermath of Wayfair, a number of states have announced or are in the process of implementing collection requirements for remote sellers lacking physical presence in the state. Some of these assertions of economic nexus are enacted by law; others (e.g., Wisconsin) have come from state taxing agencies relying on broad language of existing state nexus laws. The Massachusetts Department of Revenue, which asserts cookie nexus against remote internet sellers by regulation, issued a statement indicating its position that the Wayfair case had no effect on its ongoing assertion of nexus against remote sellers.
Since publication of the last installment of One by One, States Respond to South Dakota v. Wayfair, on July 3, 2018, 3 several states have offered new guidance, including Alabama, Hawaii, Indiana, Maryland, North Dakota, Rhode Island, Texas, and Wisconsin. To address the impact of the Wayfair decision, Utah will convene a special legislative session beginning on July 18, 2018, and New Hampshire will convene a special legislative session on July 25, 2018.
The Maryland Comptroller’s statement is notable for not providing thresholds or other detailed guidance while highlighting that economic nexus is a possibility under its law. The Comptroller offers the following statement in its FAQ: “Pursuant to Maryland law, the Comptroller’s Office shall impose sales tax collection requirements as broadly as is permitted under the U.S. Constitution. If you sell or deliver tangible personal property or a taxable service for use in Maryland, you should review and analyze the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc. to identify how it affects you.” Other states continue to review the Wayfair decision and have yet to provide guidance to affected sellers.
On July 6, 2018, the Multistate Tax Commission (MTC) held a teleconference to discuss the impact of the Wayfair case and “to get input from the states and from the public on whether there is an interest in working on uniform provisions that might be needed to implement nexus standards or related issues.” 4 The MTC will likely focus not only on sales and use tax nexus, but also extend the review to Wayfair’s potential impact on corporate income tax nexus and the taxpayer protections set forth in P.L. 86-272.
Indeed, while Wayfair dealt with sales and use tax, there is growing concern among businesses about its income tax nexus implications. Reflecting this concern, Wells Fargo’s second quarter earnings report, released on July 13, 2018, included a $481M net discrete income tax expense tied to the South Dakota v. Wayfair decision. 5
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