State of Wayfair: Indiana Settles, Maryland Adopts Emergency Rule

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 Tripp Baltz

The way is clear in Indiana.

Remote sellers struck a deal with state regulators allowing for enforcement of the state’s 7 percent sales tax on online transactions starting in October. Indiana’s law has the same thresholds—$100,000 in annual in-state sales or 200 transactions—as the South Dakota statute at the center of the U.S. Supreme Court’s June 21 South Dakota v. Wayfair, Inc. ruling.

Dismissal of the Indiana case, approved in state court Aug. 27, ends more than a year of litigation between the American Catalog Mailers Association and the Indiana Department of Revenue.

The groundbreaking 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—has many states looking to expand their authority over online sales taxation. The majority in the 5-4 Wayfair ruling suggested strongly that South Dakota’s law would pass constitutional muster.

The court stopped short of formally declaring South Dakota’s law valid in the absence of Quill, and a South Dakota circuit court still has to bless the state’s economic nexus model before it can become effective. The parties in the Wayfair case are negotiating on a potential settlement, and the South Dakota Legislature is going into a special session Sept. 12.

In the meantime, dozens of states that haven’t already done so are mulling whether to copy South Dakota’s law.

Concessions Extracted

The ACMA challenged Indiana’s authority to require out-of-state sellers to collect and remit. In exchange for dropping its suit, the ACMA extracted several concessions that could pop up in agreements with other states where retailers are battling similar state taxing authority.

First, the state agreed to not impose retroactive liability for periods prior to Oct. 1. Hamilton Davison, ACMA president and executive director, told Bloomberg Tax in an Aug. 29 email that Indiana’s law “only prohibited retroactive liability prior to the effective date of the statute, which was July 1, 2017.” For retailers, this could translate into more than a year of sales tax savings.

Second, the department “committed to maintain all of the current features of the Indiana law that the Supreme Court referenced in the Wayfair decision,” Davison said. Those features include membership in the Streamlined Sales and Use Tax Agreement (SSUTA), a program under which sellers collect tax voluntarily and remit it to the 24 state participants, which cover filing costs and other fees; sales tax administration software paid for by the state; and maintaining the state’s current statutory thresholds for nexus until at least Feb. 1, 2019.

Indiana Department of Revenue spokesperson Emily Landis told Bloomberg Tax in an email that the agreement “essentially says that we have to agree to follow the law and cannot apply a different standard, which are things we are already required to do.” Since the nexus is set in state statute, “that is not something we could change anyway on our own.”

Randal Kaltenmark, a partner at Barnes & Thornburg LLP’s Indianapolis office told Bloomberg Tax Aug. 29 that the agreement was consistent with the Department of Revenue’s “wait and see” approach to taxation of out-of-state retailers. “They’re trying to take an even handed approach rather than be heavy handed.”

Litigation in Other States

Similar lawsuits are pending in Ohio, Virginia (over a Massachusetts regulation), Tennessee, and Wyoming.

An attorney for Crutchfield Corp. in Charlottesville, Va., told Bloomberg Tax Aug. 29 that there has been no update in its litigation with the Massachusetts Department of Revenue.

In Tennessee, a spokeswoman for the state attorney general told Bloomberg Tax that a status conference is scheduled for Sept. 4 in its remote seller case.

Steve DelBianco, president and CEO for NetChoice, told Bloomberg Tax Aug. 29 that its lawsuit in Tennessee is “still pending and we have scheduled discussions.” But regardless of the outcome, the Legislature has to act before collections can be required from remote sellers operating in that state, which won’t happen before January 2019, he said. The Tennessee Legislature is scheduled to reconvene Jan. 8, 2019.

South Dakota Looks to Legislature

No court date has been set in South Dakota for the Wayfair case, Wade LaRoche, spokesman for the Department of Revenue, told Bloomberg Tax Aug. 28.

Meanwhile, the state’s lawyers continue to negotiate a potential settlement with the companies in the case—Wayfair Inc., Newegg Inc., and Overstock.com Inc.—that could clear the injunction put in place by the circuit court, answer implementation questions, and allow South Dakota to start planning for new tax revenue.

LaRoche said, however, that the department believes the issue will be settled legislatively. “We do anticipate that the next movement on this will take place at the special session” set for Sept. 12 called by Gov. Dennis Daugaard (R).

Daugaard has been meeting with lawmakers on two draft bills, one of which would attempt to remove the injunction. The other would create a sales tax license for remote marketplace facilitators like Etsy Inc. and eBay Inc., requiring them to collect and remit the sales tax on behalf of their sellers, according to Kelsey Pritchard, Daugaard’s spokeswoman.

Got Compliance?

How’s your state doing with Wayfair? Check out this checklist from the Tax Foundation.

A new report from the conservative-leaning Washington-based think tank says only 10 of the 32 states that have enacted or have proposed an economic nexus model are in accord with what the group calls “the Wayfair checklist.” The list mirrors suggestions by recently retired Justice Anthony Kennedy regarding economic nexus constitutionality in the Wayfair ruling.

In the Wayfair opinion, Kennedy suggested a state’s law could pass constitutional muster if:

  • the state installed a threshold that recognizes a “substantial nexus,”
  • the state didn’t push for retroactive taxes, and
  • the state is a member of the SSUTA.

A majority of the 32 states surveyed in the report fell into categories “State can proceed with caution” and “State should proceed only after making legislative changes.”

Only Colorado and Louisiana were deemed “Not compliant with the Wayfair checklist.”

And Speaking of Lists...

A Multistate Tax Commission work group is continuing to hammer away at a list of issues about marketplace facilitators such as Amazon.com Inc., Etsy, and eBay, which often process payments and handle shipping and delivery for sellers involved in online transactions.

Many states are mulling laws to require marketplace facilitators to collect and remit sales and use taxes in the wake of Wayfair. The MTC list chalks off several items deemed to be priorities to states, including whether there ought to be uniform definitions for terms such as “marketplace,” “marketplace seller,” “marketplace facilitator,” “referral,” and “referrer.”

Post-Wayfair, many state tax administrators said handling of marketplace facilitators was their lead concern. The work group is aiming to make a report to the MTC Uniformity Committee at the commission’s fall committee meetings in November in Orlando, Fla. Some members of the group have questioned whether—given that timeline and the sense of urgency in a post-Wayfair environment—the list should include fewer than its current eight major policy areas.

Gee, Income Too?

For example, one major question is whether states imposing a sales volume-based economic nexus threshold for sales and use tax collection now that Quill is gone should also consider adopting an economic—or some other factor presence—nexus threshold for income tax?

Michael Mazerov of the Center on Budget and Policy Priorities said that while the Wayfair implications for income tax are important, it would be best for the group to hone its focus on sales tax, given that time is short.

“It’s important for us to make as much progress as possible, even it it doesn’t result in an MTC model,” he said. “We want to minimize the extent to which states next year go off in 20 different directions.”

Emergency Approval in Maryland

Maryland approved its emergency rules on remote sales—requiring vendors with more than $100,000 in sales or 200 transactions into Maryland to collect and remit beginning Oct. 1.

The rules will remain in effect until March 30, 2019, after which permanent regulations—currently winding their way through the normal rulemaking process—will take effect, Joseph Shapiro, spokesman for the Maryland Office of the Comptroller, told Bloomberg Tax Aug. 29. The office is drafting a tax alert that will be published after feedback is received from the public.

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