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 Ryan Prete
The landmark U.S. Supreme Court decision involving Wayfair and states’ ability to tax online sales could present new challenges to the digital goods and services industry, according to tax lawyers.
“Below the e-commerce giants like Amazon, you have the real affected parties, which are those selling software on various platforms and app developers,” Mark Nebergall, president of the Software Finance & Tax Executives Council (SoFTEC), told Bloomberg Tax. “I ask does the Wayfair decision add pollution to the app-developer ecosystem? And I think it certainly does.”
In South Dakota v. Wayfair, decided June 21, Justice Anthony Kennedy led a 5-4 majority in throwing 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.
Third-party developers and vendors make up a significant part of the digital goods and services sector, which includes software, downloaded media content, and mobile applications, said Nebergall, a co-author of a Bloomberg Tax portfolio on cloud computing. And some of these services can be tendered and sold from a remote location without the need for distributions centers.
As a result, these services once benefited from the now-deceased Quill physical presence rule and could be vulnerable as states are expected to extend their tax authority over online sales in the wake of Wayfair.
By contrast, Nebergall said providers of digital goods that already can be taxed in all states that impose a sales tax, such as Microsoft Corp., won’t face as much of a change because of Wayfair, because they are likely already collecting and remitting sales tax on purchases. That is also true of e-commerce giant Amazon.com, Inc., which has collected sales tax in every relevant state since early last year.
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.
The South Dakota Supreme Court still has to bless the state’s economic nexus model before it can become effective. Still, many observers project that states will flock to copy South Dakota’s model as soon as the state Supreme Court presumably does that. The state court’s decision is expected in mid-August.
Nebergall said app developers who sell their products through an online marketplace and qualify for a state’s economic nexus regime—which imposes sales tax collection duties on retailers that rise above a specified sales threshold—will now be forced to collect and remit sales tax. Connecticut, Minnesota, Oklahoma, Pennsylvania, Rhode Island, and Washington already require the marketplace to collect that tax.
The problem facing these smaller developers and retailers, according to Jeffrey Friedman, a tax partner at Eversheds Sutherland (US) LLP in Washington, is that many of them don’t know the locations of their customers.
Friedman told Bloomberg Tax that when it comes to heightened compliance challenges in the digital goods realm, three categories of sellers come to mind: non-U.S. sellers, sellers who don’t know the locations of their customers, and start-ups.
“Non-U.S. sellers that do not have U.S. operations have been able to largely ignore sales and use taxes under the physical presence regime. These sellers now must get up to speed quickly and, in some cases, put in place sales tax compliance systems,” Friedman said. “Also, we have worked with other clients who sell to customers that do not provide reliable location information. These sellers will be forced to put in place reasonable assumptions about how best to determine the sourcing of a particular sale.”
Friedman said vendors who sell sales tax software and systems are aggressively marketing to all three parties, but especially to start-ups.
“Start-up companies that sell digital goods but do not have the resources or time to put in place a sales tax compliance system are feeling the impact of the court’s decision,” he said.
Many states with South Dakota “copycat” laws are either moving ahead or already consider them to be in place. Along with Hawaii, Oklahoma, and Kentucky, Connecticut, Illinois, and Vermont are set to have economic nexus laws take effect before 2019.
A few that were contingent on Wayfair will have to wait for the South Dakota Supreme Court to issue an opinion on remand. Below are specifics of those South Dakota-esque regimes, including effective dates:
To contact the reporter on this story: Ryan Prete in Washington at email@example.com
To contact the editor responsible for this story: Ryan C. Tuck at firstname.lastname@example.org
Copyright © 2018 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)