State of Wayfair: First Look at South Dakota Bills

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By Tripp Baltz

And now, for my next trick ...

South Dakota, the state that successfully “killed Quill” and passed the economic nexus model that now leads the way for other states looking to collect taxes on remote sales, raised the curtain Aug. 30 on its next act: a pair of bills for lawmakers when they meet in special session Sept. 12.

The first bill (S.B. 1) takes aim at clearing the preliminary injunction blocking the state from enforcing its law requiring remote vendors to collect and remit South Dakota’s sales and use tax. If approved, the measure would apply to all out-of-state sellers except the litigants in the groundbreaking U.S. Supreme Court ruling in South Dakota v. Wayfair.

The June 21 ruling tossed out Quill Corp. v. North Dakota, the 1992 physical presence threshold for when states could tax remote sales, and suggested strongly that South Dakota’s law—which includes an annual triggering threshold of $100,000 in sales or 200 in transactions—would pass constitutional muster. The ruling has dozens of states considering whether to copy South Dakota’s law, if they haven’t already done so.

A circuit court in South Dakota has yet to consider lifting the injunction and blessing the state’s model. Meanwhile the parties to the case—which include Wayfair Inc., Newegg Inc., and Overstock.com Inc.—are negotiating a possible settlement with the state.

But the South Dakota Department of Revenue believes the Legislature will act first. S.B. 1 would set Nov. 1 as the deadline for remote sellers to get licensed and begin collecting and remitting taxes, in addition to tackling the injunction.

It would also nix the state’s ability to sue remote sellers for not collecting taxes based on a lack of physical presence—such a tool would no longer be necessary.

The second bill (S.B. 2) would address marketplace facilitators, which process payments and handle marketing and delivery for third-party sellers but often don’t collect the tax owed by buyers. The bill defines the key terms “marketplace,” “marketplace provider,” and “marketplace seller,” and makes it clear that marketplace providers have the collect-and-remit obligation—not sellers—as long as certain conditions are met. That requirement would kick in March 1, 2019.

Similar Lawsuits

Lawsuits similar to the Wayfair case were filed in Indiana, Ohio, Tennessee, Virginia, and Wyoming. Wyoming and the companies are continuing to talk about a settlement in the state, which has a law identical to South Dakota’s, Dan Noble, revenue director in the Equality State, told Bloomberg Tax Aug. 30.

The state sued Wayfair, Newegg, and others in July 2017 right after its South Dakota-style law went on the books, inviting a countersuit by the e-commerce industry. The American Catalog Mailers Association and NetChoice said the Quill physical presence standard blocked Wyoming from forcing out-of-state vendors to collect and remit sales and use taxes.

Overstock.com is no longer negotiating, Noble said—the Utah-based company began collecting and remitting Wyoming taxes after the Wayfair ruling.

Quill‘s gone. Now Wyoming wants to move forward with its economic nexus just like many other states. But like South Dakota, an injunction—this one triggered by the state’s law itself—stands in the way. Wyoming was originally aiming for an Oct. 1 deadline for remote vendors to get licensed and begin collecting and remitting taxes, but Noble now says the deadline is “probably going to be later in the year or early next year.”

In the Crutchfield case in Virginia, which involves the state of Massachusetts, the parties disagree about the scope of discovery with respect to the state defendants’ motion to dismiss for lack of personal jurisdiction, Matthew P. Schaefer, attorney with Brann & Isaacson, told Bloomberg Tax.

Of the remaining state cases, Indiana settled Aug. 29; Tennessee might need to wait for some action by the state Legislature; and Ohio had nothing to report Aug. 30.

New York Locals: Count Us In

Local governments in New York want a piece of the remote sales tax game. The state’s local governments will be urging the governor and state lawmakers to switch from a physical presence to an economic nexus model next year, Stephen J. Acquario, executive director of the New York State Association of Counties, told Bloomberg Tax Aug. 30.

Acquario said he hopes Gov. Andrew M. Cuomo (D) will include a remote sales measure with his proposed budget for the 2019-20 fiscal year in early 2019. Local governments stand to gain $100 million to $150 million a year in added sales tax revenue with the switch to economic nexus.

South Dakota thresholds of $100,000 in sales or 200 transactions are probably too low for New York, Acquario said, but would be a good starting point for discussions.

New York is being closely watched because the state is such a large market and it has aggressively pursued taxation of online sales for several years. It was the first to adopt a “click-through” nexus statute in 2008, and the law was upheld five years later by the state’s highest court.

Kentucky: Dearly Beloved Retailer, UOMe

The Kentucky Department of Revenue is beginning pen-pal relationships with 600 of the nation’s 1,000 largest online retailers.

The state is reminding those companies they aren’t currently registered to remit Kentucky’s 6 percent sales tax. Like many other states, Kentucky intends to enforce its remote sales tax requirement starting Oct. 1.

DOR Commissioner Daniel Bork discussed the letter campaign Aug. 30 in his testimony before an interim joint committee on appropriations and revenue. Bork said it was “one of the ways” Kentucky is reaching out to start collecting sales tax from out-of-state retailers under its economic nexus law that mirrors South Dakota’s.

Richard Dobson, executive director for the department’s office of sale and excise taxes, testified that the state is also pushing compliance through the Streamlined Sales Tax Governing Board Inc.

Minnesota’s Motto: Be Prepared

While Minnesota is “statutorily well prepared” to respond to the sales tax climate emerging in the wake of Wayfair, an economic policy think tank pointed to at least five issues lawmakers may want to address in the near future.

In an Aug. 30 commentary, the Minnesota Center for Fiscal Excellence noted that recent data from the House tax committee estimates collections of between $150 million and $210 million due to Wayfair. The new dollars will likely trigger interest for schemes to cut the state’s general sales tax rate to reflect increased tax collections from remote sales and achieve tax neutrality.

The center also pointed to a potential need for legislative action to modify the implementation date to accommodate the compliance challenges of small remote sellers, adjust Minnesota’s marketplace provider law to minimize confusion over the party holding collection duties, clarify which party is liable for the results of an audit, and clarify the threshold for collection duties in business-to-business transactions.

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