High Court’s Online Sales Tax ‘Blueprint’ Gaining Steam

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By Ryan Prete

A U.S. senator, state policy analysts, and tax lawyers are all expecting states to mirror South Dakota’s tax regime after the U.S. Supreme Court threw out a rule that prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

“I think a lot of states will come out and copy what South Dakota does, and the justices have really laid out a blueprint for states to follow,” Sen. Heidi Heitkamp (D-N.D.) told an audience at the Urban Institute after the high court’s landmark June 21 ruling in South Dakota v. Wayfair.

The blueprint Heitkamp is referring to is three characteristics of South Dakota’s regime underscored by Justice Anthony Kennedy, who authored the opinion, in suggesting the state law would pass constitutional muster:

  •  the state installed a threshold that recognizes a “substantial nexus,”
  •  the state didn’t push for retroactive back taxes, and
  •  the state is a member of the Streamlined Sales and Use Tax Agreement (SSUTA).
The U.S. Supreme Court June 21 issued a 5-4 ruling in Wayfair that threw out its divisive 1992 rule in Quill Corp. v. North Dakota. Quill, which states like the petitioning South Dakota for years have tried to “kill” through lawsuits and regulation, prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

The majority in Wayfair suggested strongly that South Dakota’s law would pass constitutional muster; the state’s model imposes the tax collection threshold at 200 separate transactions or $100,000 in in-state sales. But the court stopped short of formally declaring that South Dakota’s law, which dozens of states have mimicked already, was valid in the absence of Quill. The court just made clear that Quill was no longer part of any commerce clause test for when states may impose taxes.

Accordingly, the South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. Still, many project that states will flock to copy South Dakota’s model.

Mirror South Dakota

Joseph Bishop-Henchman, executive vice president of the Washington-based Tax Foundation, recommended that states mirror South Dakota’s law.

“It only takes one bad tax administrator to push the boundaries and ruin this for everyone,” he said at the Urban event. “Maybe a state only follows one or two of the guidelines; this could put us all the way back to the beginning, and have a court questioning the real burden of this law.”

The South Dakota Department of Revenue said it expects the South Dakota Supreme Court to issue a decision in August on the question the high court remanded: whether the state law is constitutional.

“The Department of Revenue expects that the U.S. Supreme Court will formally send its decision to the South Dakota Supreme Court in mid-July. The case will return to the State Circuit Court with the possibility for an August decision,” according to a June 26 news release.

When it comes to mirroring South Dakota’s model, its northern neighbor, North Dakota, was ahead of the game, passing an identical measure in 2017, but like in several other states, the law was contingent on the high court reversing Quill.

According to Ryan Rauschenberger, North Dakota’s state tax commissioner, the state now considers its law to be in effect and is “working with each individual retailer” to bring them into compliance.

Rauschenberger told Bloomberg Tax June 26 that the department is very confident in the strength of its legal position and is not concerned about litigation. This is because the law was modeled on the South Dakota law that was at the center of Wayfair, has the same provisions as the South Dakota law, and because the state is in the SSUTA.

New Streamlined Members?

Twenty-one states that administer a sales tax aren’t members of the SSUTA.

According to Bloomberg Tax data, 20 states have an economic nexus model in place: Alabama, Connecticut, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, Washington, and Wyoming.

Of these states, Alabama, Connecticut, Illinois, Louisiana, Maine, Mississippi, and Pennsylvania aren’t full member states of the SSUTA.

“I don’t think either California or New York will join streamlined, and it’s possible they could push for a higher threshold than South Dakota,” Max Behlke, director of budget and tax for the National Conference of State Legislatures, said during the Urban event. “I would expect a lot of smaller states to join streamline in the coming months.”

Bishop-Henchman said he was hopeful that large states like California, Florida, New York, and Texas would join SSUTA in the near future.

Alabama’s Rogue Model

Alabama’s revenue department is drafting rules now to apply current state law to “simplify the collection and remittance process for remote sellers” through its Simplified Seller’s Use Tax program, Frank Miles, a spokesman for the Alabama Department of Revenue, told Bloomberg Tax.

He didn’t elaborate on what rule changes are being made. But the state did enact legislation earlier this year that requires either collection or notification and reporting by marketplace providers like eBay Inc., Etsy Inc., and Amazon.com Inc.

Whether the state will go beyond its own simplified remittance program isn’t clear and would depend on state lawmakers.

“Any change to the existing statutes, including participation in the Streamlined Sales and Use Tax Agreement, would require action by the Alabama Legislature,” Miles told Bloomberg Tax June 26.

The revenue department previously told Bloomberg Tax it would halt enforcement of its economic nexus regulation while it considered changes to the program in light of Wayfair.

Uncertainty in Illinois

The Illinois Department of Revenue and legislative committees focusing on tax policy are reviewing the Wayfair ruling in the context of a new state law aimed at remote sellers. The Illinois budget, Public Act 100-0587, included provisions implementing a South Dakota-style economic nexus standard. The public act becomes effective Oct. 1 and isn’t retroactive.

But it isn’t clear Illinois has the appetite or the legal obligation to embrace the SSUTA as it implements the new law.

A spokesman for the revenue department declined comment on the SSUTA question, noting the department’s general counsel is still reviewing the decision. But taxpayer groups and tax practitioners expressed doubts about participation in the SSUTA.

“I don’t think anyone is going to push for Illinois to become a streamlining state—unless and until a challenge claiming that’s a fatal flaw in a state’s ability to force remote sellers to collect use tax is successful,” said Carol Portman, president of the Taxpayers’ Federation of Illinois.

Pennsylvania: Low Likelihood

Matthew D. Melinson, a Philadelphia-based partner and National SALT Practice Indirect Tax Services Leader at Grant Thornton LLP, said Pennsylvania is likely to be “less impacted than other states” by the Wayfair decision because Pennsylvania recently passed a law to recoup more sales tax from online sales.

Act 43, which was passed last year and went into effect April 1, requires online platforms with sales of $10,000 or more in a calendar year to either remit Pennsylvania’s 6 percent sales tax on behalf of their third-party vendors or comply with new notice and reporting requirements. As a result, most large online platforms such as Amazon and Etsy are already collecting and remitting sales tax for Pennsylvania because remittance is easier than complying with the law’s reporting requirements.

“I know that Pennsylvania likes the direction” it is moving as a result of Act 43, “so they’re not super-motivated to do anything soon,” Melinson said.

On the possibility of joining the SSUTA, Jeffrey Johnson, Pennsylvania DOR spokesman told Bloomberg Tax June 26 that joining the SSUTA “would require legislative action by the state General Assembly. It would be a complex piece of legislation that impacts many people and businesses, meaning such a proposal would need to be thoroughly studied before any action is taken.” He said the department is carefully considering all of its options before acting on the Wayfair decision.

Pennsylvania did a study a few years ago on the SSUTA and concluded that it wasn’t in the state’s best interest to join, based on what is taxed in the state and what the agreement costs, Melinson told Bloomberg Tax June 26. The Wayfair decision won’t significantly alter those calculations right away, he said.

Melinson said he doesn’t expect to see increased litigation in Pennsylvania because so far, the state hasn’t been aggressive in collecting tax from smaller online vendors that don’t have any physical presences in the state.

Given that Pennsylvania just passed a budget, there is a “low likelihood” the state will push any new legislation in response to Wayfair right away, Melinson said. Legislation could come next year during budget discussions, at which point Pennsylvania could opt to increase the $10,000 threshold to come more in line with other states, he said.

With assistance from Michael J. Bologna in Chicago, Chris Marr in Atlanta, and Leslie A. Pappas in Philadelphia

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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