States Could Tax Online Sales Retroactively, Legally Speaking

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 and Tripp Baltz

The threat of retroactivity still hangs over the heads of online retailers in a post-Wayfair world.

As states move closer to officially requiring online retailers to collect sales tax on out-of-state purchases, some state and local tax lawyers still believe the application of retroactive taxes remains a possibility, partly because the definition of retroactivity still remains rather ambiguous.

“The Supreme Court has been very reluctant to wade into retroactivity in the past. It’s complicated, and its difficult to figure out what the right rule should be, and there is obviously no right answer,” Charles Rothfeld, special counsel at Mayer Brown LLP in Washington, told Bloomberg Tax. “Under the current standard, legislatures have a significant amount of leeway when it comes to what they can do.”

Let’s rewind for a second:

In 1994, the U.S. Supreme Court ruled in United States v. Carlton, deciding not to define constitutional retroactivity. Joe Huddleston, an executive director at Ernst & Young LLP’s National Indirect Tax group, told Bloomberg Tax that the court could have established ground rules governing time frames and the “legitimate purposes” of state governments in establishing retroactive tax statutes.

In May 2017, the high court decided it wouldn’t review challenges by IBM, Goodyear, and other companies to retroactive tax laws in Michigan and Washington state, an opportunity tax attorneys wished the justices would have used to provide more clarity on how far back in time a state may stretch its tax statute.

Fast forward to the June 21 South Dakota v. Wayfair ruling—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales. The majority in the 5-4 ruling suggested strongly 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 didn’t rule on the validity of South Dakota’s law in the absence of Quill, and one of three things could happen soon to allow the law to go into effect: (1) A circuit court could lift an injunction pinning down the law; (2) the legislature could approve a bill during a planned Sept. 12 special session that would clear the injunction; or (3) the state and the companies in the case could settle.

However, Justice Anthony Kennedy did suggest in Wayfair that a state’s law was more likely to pass constitutional muster if the state didn’t push for retroactive taxes.

Enactment vs. Implementation

Twenty five states have enacted economic nexus laws since the court ruled in Wayfair, and seven other states are considering enacting laws. The 25 states have all established an implementation date (listed below). However, each of these states enacted their laws well before the implementation date.

For example, Georgia enacted its economic nexus law on May 3, 2018, but the law goes into effect Jan. 1, 2019.

State tax lawyers say it would be a clear retroactive move if the state required remote retailers to collect back to the law’s enacted date, verses the announced implementation date.

“I would definitely call that retroactive application,” Jennifer Karpchuk, a state tax attorney at Chamberlain Hrdlicka in Philadelphia, told Bloomberg Tax. “If states decide to try this approach, I would expect it to be met with legal challenges on constitutional grounds.”

Richard D. Pomp, the Alva P. Loiselle Professor of Law at the University of Connecticut School of Law, agreed that the attempt would be considered retroactive, but he didn’t think such an attempt is likely.

“I think the states are going to be gun shy about raising this issue just to grab a few extra bucks,” Pomp told Bloomberg Tax.

Rothfeld also said that move would constitute retroactivity and receive backlash.

“I don’t know whether states will try this. It would be controversial and would prompt political push back, so I think most states won’t move in that direction, but some could. But I don’t know whether that is in the works anywhere,” Rothfeld said.

Of the 25 states that have enacted an economic nexus model, only two—South Dakota and Maine—prohibit the state from applying retroactive back taxes. This doesn’t mean all other states are guaranteed to pursue retroactivity; it just means that all other states haven’t legally barred themselves from the activity.

Past Retro Attempts

Hawaii essentially attempted this method in July.

Hawaii’s economic nexus requirement became effective July 1, 2018, but the state initially sought to impose collection obligations back to Jan. 1, 2018.

The Council On State Taxation—a Washington-based nonprofit trade association—responded with a letter objecting to the retroactive application and urging the state to eliminate the retroactivity. Hawaii ultimately stepped back from the plan.

Massachusetts has also teetered on retroactivity. In a June 5 notice sent to Bloomberg Tax, the Massachusetts Department of Revenue alerted an unidentified vendor of an unfiled return. Those returns stem back to the implementation of Massachusetts’ "cookie nexus” tax regime, which requires online vendors to collect state sales tax if they have property interests in or use in-state apps and cookies.

The letter says the taxpayer needs to file tax returns from Oct. 1, 2017, (when the cookie nexus regime took effect) to April 30, 2018.

The notice doesn’t threaten retroactive back tax liability, but it does say that additional interest and penalties will be avoided if the overdue returns are filed within a month.

Confident More States Won’t Go Retro

Greg Matson, executive director of the Multistate Tax Commission, told Bloomberg Tax most states aren’t going to retroactively impose a collect-and-remit obligation on remote sellers.

Post-Wayfair, “States are interested in getting up and going and getting it right, and doing it in the smoothest fashion possible,” he said. “They’re not going to jump out there and start applying a 3-year lookback period” or some other way to apply tax remittance requirements retroactively, he said.

Any state that sets a compliance date after the date of the Wayfair decision—June 21—is “on good ground” in terms of avoiding a challenge by remote vendors on the question of retroactivity, Jeff Glickman, partner-in-charge of Aprio LLP’s State & Local Tax practice, told Bloomberg Tax.

“Leading up the Wayfair decision, we had 15 or so states that had already enacted some form of economic nexus,” he said. “Most are now setting dates of Oct. 1, Nov. 1, even Jan. 1, to let vendors get up to speed.”

“It’s important to keep in mind all the compliance factors” that vendors will need to meet going forward after Wayfair, Joe Huddleston, an executive director in the National Indirect Tax Group at Ernst & Young LLP, told Bloomberg Tax. “It’s extremely difficult to get all these compliance systems online quickly. It’s going to take longer than they might think.”

States that had statutes in place before Wayfair that required remote vendors to choose between voluntarily collecting and remitting sales and use taxes or complying with Colorado-style reporting-and-notice laws will probably be fine enforcing those laws with effective dates before June 21, Glickman said. “They probably have a right to force vendors to do that because the Supreme Court did not take up” the challenge to Colorado’s law.

That law, which was affirmed as constitutional by the U.S. Court of Appeals for the Tenth Circuit in February 2016, requires sellers that don’t collect and remit Colorado sales and use taxes to (1) notify buyers at the time of transaction that tax isn’t being collected but may be due, (2) provide consumers with an annual report of their purchases, and (3) send an annual report showing the total dollar amount of each buyer’s purchases.

States offering a choice between collect and remit or report and notify are “giving you an opt-out” if you are a remote vendor, Glickman said.

Post-'Wayfair’ Implementation Dates
  • Alabama (Oct. 1, 2018), $250,000 in in-state sales;
  • Connecticut (Dec. 1, 2018), 200 transactions and $250,000 in in-state sales;
  • Georgia (Jan. 1, 2019), 200 transactions and $250,000 in in-state sales;
  • Hawaii (July 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Illinois (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Indiana (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Iowa (Jan. 1, 2019), 200 transactions or $100,000 in in-state sales;
  • Kentucky (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Louisiana (Jan. 1, 2019), 200 transactions or $100,000 in in-state sales;
  • Maine (Implementation date not yet announced), 200 transactions or $100,000 in in-state sales;
  • Massachusetts (Oct. 1, 2017), 100 transactions and $500,000 in in-state sales;
  • Michigan (Oct. 1, 2018) 200 transactions or $100,000 in in-state sales;
  • Minnesota (Oct. 1, 2018), 100 transactions or $100,000 in in-state sales in at least 10 transactions;
  • Mississippi (Dec. 1, 2017), $250,000 in in-state sales;
  • North Dakota (Oct. 1, 2018, or 60 days after a remote retailers meets the state’s threshold—whichever is later), 200 transactions or $100,000 in in-state sales;
  • Ohio (June 30, 2017), $500,000 in in-state sales;
  • Oklahoma (July 1, 2018), $10,000 in in-state sales;
  • Pennsylvania (April 1, 2018), $10,000 in in-state sales;
  • Rhode Island (Aug. 17, 2017), 200 transactions or $100,000 in in-state sales;
  • South Dakota (contingent on state court’s approval, or settlement, after high court’s Wayfair decision, but pushing for Nov. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Tennessee (currently on hold due to litigation), $500,000 in in-state sales;
  • Utah (Jan. 1, 2019), 200 transactions or $100,000 in in-state sales;
  • Vermont (July 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Washington (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales;
  • Wyoming (Oct. 1, 2018), 200 transactions or $100,000 in in-state sales.

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