Businesses Seek State Commitment: No Retroactive Online Sales Tax

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Tripp Baltz

The top concern for businesses post-Wayfair is whether states will seek to impose a retroactive remote sales tax payment liability.

“Retroactivity is in my mind the scariest issue out there,” said Leah Robinson, leader of the state and local tax group at Mayer Brown in New York. Robinson said during a July 25 panel at the Multistate Tax Commission’s 51st annual meeting in Boston that many online businesses won’t consider the issue closed “until every state comes forward with some type of non-reversible guidance that says it’s off the table.”

That potential was front and center at the July 24 House Judiciary Committee hearing as well, and has bubbled up in many states that have sought to enforce or expand their laws after the U.S. Supreme Court’s pivotal June 21 ruling in South Dakota v. Wayfair, But many states, and most state observers, have suggested they won’t do so—and the majority in Wayfair specifically pointed to South Dakota’s prohibition on retroactivity in suggesting that state law was constitutional.

The high court tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales. But the majority in the 5-4 ruling merely suggested that South Dakota’s law would pass constitutional muster; the statute imposes a tax collection threshold at 200 transactions or $100,000 in in-state sales.

The court stopped short of formally declaring South Dakota’s law valid in the absence of Quill, and the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. It’s expected to do so in mid-August.

In the wake of the decision, dozens of states that haven’t already done so are mulling whether to copy South Dakota’s law. State policymakers predict few—if any—will impose a retroactive tax liability.

‘Off Table’

“I don’t think the states are going” to impose their laws retroactively, said Nancy Prosser, general counsel in the Texas Comptroller of Public Accounts’ office, said during the MTC meeting. “I feel like that’s off the table.”

If there is uncertainty on the issue, even if larger companies might not feel an obligation to remit past taxes, they “absolutely are going to have a reserve, and keep it on their books forever,” Robinson said. “We need clear guidance, hopefully in the form of statutes with effective dates in the future,” she said.

“Give us some time, it’s only been a month,” Prosser responded.

Prosser said she believed the court didn’t dictate only “one path forward” as states look to implement, and potentially expand, remote sales tax collection. For instance, Texas isn’t a member of the Streamlined Sales and Use Tax Agreement (SSUTA), she said.

South Dakota’s adoption of the SSUTA was one of the features of the state’s tax system “that appear designed to prevent discrimination against or undue burdens upon interstate commerce,” the majority said in Wayfair.

As part of the program, sellers collect tax voluntarily and remit it to the 24 state participants, which cover the filing costs and other fees.

‘Marathon’ Not Sprint

“Since the ruling, I’ve heard the drumbeat of ‘just do streamlined,’” she said. “Please let’s not say, ‘physical presence is the past, and now you have to do streamlined.’ I see this as a marathon, not a sprint. There’s many ways to get there. Let’s not box ourselves into one path forward.”

Craig Johnson, executive director of the Streamlined Sales Tax Governing Board Inc., agreed the court didn’t mandate the adoption of the SSUTA, but he said the ruling “went to great lengths” to say “these are the things we think are extremely important.”

“The court gave some very good direction as far as what they see as the requirements if you want to remove the undue burdens,” he said. Undue burdens weren’t briefed nor litigated in the case, he said, but the court noted “systems are being developed that remove undue burdens.”

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