State Tax Bogeyman Real or Overhyped After Online Tax Ruling?

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

Collection deadlines are too soon. States are coming for back taxes. Congress should still intervene.

E-retailers selling products through platforms like Amazon.com Inc. have many concerns after the U.S. Supreme Court removed a major obstacle to when states could tax online sales.

Retail advocates are trumpeting them in urging caution and uniformity as states roll out, and potentially expand, their online sales tax regimes.

But how valid are these fears?

The answers vary in speaking to state and local tax officials closely affiliated with the “tax case of the millennium,” the June 21 ruling in South Dakota v. Wayfair. The high court tossed out Quill Corp. v. North Dakota, the high court’s disputed 1992 physical presence threshold for when states could tax remote sales, and suggested strongly that South Dakota’s law would pass constitutional muster.

States are expected to become even more active in taxing online sales after the ruling, and uniformity-interested groups like the Multistate Tax Commission and retail groups are trying to work through these concerns as collection deadlines loom.

Retroactive Genie ‘Back in Bottle’

No state has formally said it will pursue retroactive taxes after Wayfair, but retail groups and companies already have raised the alarm bells in Massachusetts and Hawaii, among other places. And while some have come close, Max Behlke, director of budget and tax for the National Conference of State Legislatures (NCSL), said back taxes should no longer be a real concern.

“If states were actively pursuing retroactivity, this would be a huge concern to business owners, but nobody is doing it, and if states haven’t gone for it yet, then I suspect they won’t be at all,” he told Bloomberg Tax.

Mark Nebergall, president of the Software Finance & Tax Executives Council, said that retroactivity “no longer seems to be a present threat.”

“Some states came close, but quickly backed off. This problem seems to have gone away, and the retroactive genie is now back in the bottle,” he told Bloomberg Tax.

Don’t Trust Revenue Officials

As Nebergall said, some states have come close to crossing the “retroactive line.” The Council On State Taxation pushed back on Hawaii’s revised plan for remote seller taxation, encouraging the state’s Department of Taxation (DOT) in an Aug 2 letter not to impose the general excise tax (GET) on sales until after the affected seller meets the sales threshold.

On Aug. 6, Deborah Kwan, chief communications officer at Hawaii’s DOT told Bloomberg Tax, that “to avoid any constitutional concerns, the Department will NOT retroactively administer Act 41. Accordingly, taxpayers who lacked physical presence in Hawaii prior to July 1, 2018, but who met the $100,000 or 200-transaction threshold in 2017 or 2018, will not be required to remit General Excise Tax for the period from January 1, 2018 to June 30, 2018.”

Despite Hawaii’s walk back, Andrew Moylan, executive vice president for the National Taxpayers Union Foundation, thinks the possibility of retroactivity is very much a possibility in other states.

“This is still a live threat,” he told Bloomberg Tax. “I often don’t trust statements that revenue officials make.”

Moylan also noted the rarity of language throughout state laws that bars back taxes.

In fact, only two of the 25 states that have enacted economic sales tax nexus models—South Dakota and Maine—include language that exclusively bars the imposition of retroactive back taxes. Economic nexus states impose tax on those who crest a defined threshold of in-state sales. Dozens have copied South Dakota’s model of 200 transactions or $100,000 in in-state sales, and that model is expected to be the new normal post-Wayfair. Several states have defined the thresholds at lower levels.

Oct. 1 Too Soon?

Alongside retroactivity, e-retailers and trade association representing e-commerce, such as Washington-based NetChoice, Inc., have openly decried Oct. 1 start dates for sales tax collections. Currently, nine states have announced an Oct. 1 implementation date for their South Dakota-esque online tax regimes.

Moylan said an Oct. 1 start date doesn’t allow enough time for necessary procedural moves and places an extra burden on small and medium-sized businesses.

“Smaller businesses are going to have a tremendously hard time getting everything in order by October 1,” he said. “The NCSL even recommends that states wait until Jan. 1, but I guess this guideline hasn’t been taken seriously by states.”

Nebergall said Oct. 1 might be too soon for vendors in states without a sales tax—Alaska, Oregon, New Hampshire, Delaware, and Montana—to get ready to collect a tax that was essentially nonexistent before the Wayfair ruling, but predicts that state revenue departments will allow flexibility.

“If vendors are unable to collect by Oct. 1, I don’t think it would be too much for sellers to ask revenue departments for flexibility, and I think some states would honor those requests,” Nebergall said. “You also have to keep software companies in mind. Many of them have experienced such an influx in business that they may need to for additional time, too.”

Behlke said that if states start to get overly aggressive either with implementation dates or retroactive back taxes, it could spur Congress to react.

Nothing on Hill

And since the June 21 ruling, there has been a lot of federal attention on states’ taxation of online sales. But so far, there has been no tangible action—or signs that Congress will act after failing to do so for years and since the U.S. high court in 1992 said it was the best authority to do so.

The House Judiciary Committee heard a litany of online seller concerns during a July 24 hearing on the post-Wayfair world of state sales taxation—Moylan was once of eight individuals to deliver testimony—but it didn’t result in a clear road map for what’s ahead.

There are currently four bills pending to potentially affect states’ authority over online sellers, many versions of which have been pending without substantial action for years. The bills are:

E-retailer eBay Inc. has urged Congress to act in this space, something Amazon has done less vocally in the past. Neither Amazon or eBay immediately responded for request for comment on their continuing support of federal legislation, the issue of retroactivity, or impending implementation dates.

Implementation Dates, Nexus Thresholds

Below is a list of start dates and economic nexus thresholds for states with those South Dakota-esque regimes.

Alabama, Illinois, Indiana, Kentucky, Michigan, Minnesota, North Dakota, Washington, and Wyoming are set to begin requiring sales tax collections Oct. 1, drawing the ire of many e-retail groups.

  • 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 Supreme Court’s approval, or settlement, after 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;
  • 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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