Many State Online Sales Tax Laws Leave Door Open for Retroactivity

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By Ryan Prete

Many states have left open the possibility of forcing vendors to pay back taxes after a U.S. Supreme Court ruling that deemed states can hold out-of-state sellers accountable for sales tax collection.

In fact, only two of the 21 states that have enacted economic sales tax nexus models include language that exclusively bars the imposition of retroactive back taxes.

South Dakota and Maine don’t allow retroactive application of their economic nexus laws, which impose sales tax collection duties on retailers that rise above a specified sales threshold.

A New Jersey bill that would set thresholds similar to those in South Dakota also forbids retroactivity, but Gov. Phil Murphy (D) has yet to sign it.

South Dakota’s law was the hero in South Dakota v. Wayfair. In the June 21 ruling, the U.S. Supreme Court threw out its divisive 1992 ruling in Quill Corp. v. North Dakota.Quill, which states like the petitioning South Dakota for years have tried to strike through lawsuits and regulation, prohibited states from imposing sales tax collection obligations on vendors lacking an in-state physical presence.

Gold at End of ‘Retroactivity Rainbow’

Does the lack of language banning retroactivity in the remaining 19 bills leave the door open for states to push for back taxes? Carl Szabo, vice president and general counsel at internet-trade company NetChoice, thinks so.

“I am worried that states will be tempted by the pot of money at the end of the retroactive rainbow,” Szabo told Bloomberg Tax. “Some states might just not care about what a push for retroactivity might mean.”

Retroactivity was a move Justice Anthony Kennedy suggested states avoid in the Wayfair opinion, which he wrote.

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.

Massachusetts Notice

Some states have been more aggressive than others when it comes to pursuing back taxes.

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 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.

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.

Szabo says the notice tiptoes on the line between understandable liability and burdensome retroactivity.

“What this Massachusetts letter shows is that some states are going to go as far as they can to grab as much money as they can from retailers,” he said. “It’s troublesome that the state is asking for these taxes now versus at the time the cookie nexus regime was implemented.”

DOR spokesperson Nathalie Dailida told Bloomberg Tax that while the department couldn’t comment on communications with individual taxpayers, certain vendors “making significant internet sales into Massachusetts are subject to the state’s sales and use tax collection obligation when the vendor has the specified ‘physical’ contacts with the state.”

Dailida said that nearly 300 businesses have registered with the department in connection with the cookie nexus regulation. The DOR continues to follow up with taxpayers that are required to register, collect, and remit sales taxes, she said.

No Majority Pursuit

Not all professionals in the state and local tax community expect states to quickly dive into retroactive measures.

Brian Kirkell, a Washington-based principal at RSM US LLP, told Bloomberg Tax that he doesn’t foresee many states pushing for retroactivity.

“Most states are going to look at the Wayfair ruling as a huge victory and as a large windfall and will just take the victory and move forward,” he said.

Kirkell also highlighted the language laid out by Kennedy which suggested that a state not pursuing retroactive back taxes would have a higher chance of constitutionality.

“States could lend themselves to a higher chance of litigation if they pursue retroactivity,” Kirkell said.

State Implementation Dates

Most 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 and Illinois are set to have economic nexus laws take effect before 2019.

Those that were contingent on Wayfair will have to wait for the South Dakota Supreme Court to issue an opinion on remand, which is expected in August. Below are specifics of those regimes, including effective dates:

  •  Alabama (Jan. 1, 2016), $250,000 in in-state sales
  •  Connecticut (Dec. 1, 2018), 200 transactions or $250,000 in in-state sales
  •  Georgia (Jan. 1, 2019), 200 transactions or $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 (July 1, 2017), 200 transactions or $100,000 in in-state sales
  •  Iowa (Jan. 1, 2019), 200 transactions or $100,000 in in-state sales
  •  Kentucky (July 1, 2018), 200 transactions or $100,000 in in-state sales
  •  Louisiana (contingent on Wayfair ruling), 200 transactions or $100,000 in in-state sales
  •  Maine (Oct. 1, 2017), 200 transactions or $100,000 in in-state sales
  •  Minnesota (contingent on Wayfair ruling), 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 (contingent on Wayfair ruling), 200 transactions or $100,000 in in-state sales
  •  Oklahoma (July 1, 2018), $10,000 in in-state sales
  •  Pennsylvania (March 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 Supreme Court’s approval, following high court‘s Wayfair decision), 200 transactions or $100,000 in in-state sales
  •  Tennessee (currently on hold due to litigation), $500,000 in in-state sales
  •  Vermont (contingent on Wayfair ruling , July 1, 2017), 200 transactions or $100,000 in in-state sales
  •  Washington (July 1, 2017), $10,000 in in-state sales
  •  Wyoming (July 1, 2017), 200 transactions or $100,000 in in-state sales

With assistance from Aaron Nicodemus in Boston.

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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