States Preparing for Collection as Digital Sales Tax Ruling Looms

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By Tripp Baltz and Ryan Prete

States need to prepare for an increase in tax collections from remote sellers irrespective of how the U.S. Supreme Court rules in South Dakota v. Wayfair, tax administrators and private industry groups said at a Streamlined Sales Tax Governing Board Inc. meeting.

“History is on our side,” said Bruce Johnson, senior vice president of tax policy for Taxometry LLC, which provides software for calculating taxes on online sales. “We are going to get this money,” Johnson, a former chair of the Utah State Tax Commission, said during a panel session at the board’s May 2 meeting in Jackson, Wyo.

The panel focused on what state tax administrators and legislatures should be doing to prepare for a ramp-up in collection of sales and use taxes on remote transactions if the Supreme Court issues a ruling in Wayfair, a direct challenge to the court’s 1992 decision in Quill Corp. v. North Dakota.

Quill, which states for years have tried to “kill” through lawsuits and legislation, prohibits states from imposing sales tax collection obligations on vendors lacking an in-state physical presence. The case was argued April 17, and practitioners expect a decision by late June.

Registration Surge

If South Dakota prevails, states will need to educate out-of-state vendors about their obligation to collect and remit taxes, and prepare their state’s systems for a surge in sales tax licensing and registration and an increase in collections, panelists said.

“But let’s say we don’t win Wayfair,” Johnson said. “That doesn’t mean states aren’t going to do marketplace provider legislation, or reporting and notice laws. The money you are spending doing the kinds of things we’ve been discussing, these are things you need to be doing going forward anyway. More and more retailers are saying, ‘it makes sense for us to comply with the law,’” absent a clear court ruling or congressional act requiring them to do so, he said.

Representatives of the business community said most large companies already collect and remit taxes on remote purchases, but many small and medium companies lack the information they need.

‘New’ Obligation

“Small and mid-sized companies arguably are going to view this as a new compliance obligation” should the Supreme Court rule they are required to collect taxes on remote sales, said Carolynn Kranz of Kranz Associates PLLC in Washington, D.C. “A lot of them are following this, but there are still a lot of people who don’t, and we’re going to need a way to bring these small businesses in.”

States will have to build up their systems. “If you talk to your technology people, they’re probably going to tell you they don’t have enough servers,” said Diane Hardt, a division administrator of the Wisconsin Department of Revenue and a governing board delegate.

Dan Noble, president of the governing board’s Executive Committee and director of the Wyoming Department of Revenue, said his department is preparing for new vendors seeking a sales tax license so they can start collecting. “And I’ve let my governor know we need money today to do that,” he said. “Once we’ve got them in the door, now we’ve got to start managing them.”

Registration Benefits

Richard Dobson, chair of the SSTGB’s State and Local Advisory Council and executive director of the office of sales and excise taxes in the Kentucky Department of Revenue, said he estimates the state will see 50,000 to 60,000 new retailers seeking licenses. “Regardless of the decision, there are going to be benefits of having them” in the system, he said.

Panelists essentially dismissed the notion that states would be seeking retroactive payments of sales and use taxes owed on remote transactions if the Supreme Court rules in favor of South Dakota.

“I haven’t heard any state talk about going back retroactively,” said Max Behlke, director of budget and tax for the National Conference of State Legislatures.

“There’s not a court in the land that’s going to uphold that,” Johnson said. “It’s not only bad policy, and it’s not only stupid, but it’s not going to work.”

Boost in CSPs

Tim Bennett, SSTGB certification committee chair, said the group must take necessary steps to prepare for an influx of certified service providers (CSPs) following a decision in Wayfair.

CSPs are software providers that work with the Streamlined Sales Tax Initiative. Under the SST, sellers are set up with a CSP—software companies with which sellers establish an agreement to begin collecting tax. More than 3,700 businesses are enlisted in SST, according to Craig Johnson, SSTGB’s executive director.

Bennett said the board must be open to accepting and working with more CSPs so that individual sellers can collect and remit to the best of their ability.

Avalara Inc., Sovos Compliance LLC, and Taxometry are all examples of CSPs.

To contact the reporters on this story: Tripp Baltz in Denver at abaltz@bloomberglaw.com and 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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