States Urged to Proceed With Caution After ‘Wayfair’

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By Brenna Goth

A week after the U.S. Supreme Court lifted a major barrier to the collection of sales taxes from remote sellers, the question remains: How will states respond?

The majority opinion in South Dakota v. Wayfair, written by Justice Anthony Kennedy, raises legal and logistical questions. At its heart, the decision says a state can require a business to collect sales taxes even if it doesn’t have a physical presence there.

That change could help make 2019 the biggest year for state tax overhauls in “many many years,” said Max Behlke, director of budget and tax for the National Conference of State Legislatures. Behlke spoke June 28 at the organization’s Task Force on State and Local Taxation meeting in Lake Tahoe, Nev., among the first gatherings of lawmakers on the decision.

Legislators and other panelists urged states to proceed with caution and to look carefully at their laws. The high court’s opinion provides clues to how states can design their remote sales tax collection, but much is still unknown, they said.

The 5-4 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 Corp. v. North Dakota. 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.

Model After South Dakota

States have varying levels of preparedness to move on remote seller tax collection, Scott Drenkard, director of state projects at the Tax Foundation, said during a panel. He said state reactions have already ranged the spectrum.

Some lawmakers in Louisiana, for example, pushed for quick changes to help with revenue issues, while Arkansas is taking a more deliberative approach, Drenkard said. He cautioned against states rushing choices that could place an undue burden on businesses.

“If there was ever a state that was not prepared for the Wayfair decision to come down, Louisiana was certainly that state,” Drenkard said.

Having sensible rules means more companies will follow them voluntarily, Drenkard said. It’s in a state’s best interest to follow the criteria Kennedy laid out in his opinion, he said.

Generally, states that model their remote seller statutes after South Dakota’s should be in the clear, Brian Galle, a professor at Georgetown University Law Center, told attendees. That law includes a collection obligation only above a certain threshold, no retroactive liability, and compliance with the Streamlined Sales and Use Tax Agreement.

That doesn’t mean South Dakota’s model is the only option, Galle said. But the opinion only gives hints about what states can do.

Imposing retroactive taxes, for example, could raise issues unless the statute is very narrow, Galle said. Retroactive collection could result in double taxation, he said, because retailers don’t know if customers have already reported use taxes to their states.

Steve Kranz, a partner at McDermott Will & Emery LLP in Washington, said states should consider protecting against retroactivity and should emphasize that the rules also apply to foreign sellers. He also recommended implementing voluntary agreements with businesses to start collecting taxes.

Implementation Takes Time

Even states prepared to collect taxes from remote sellers could face delays. In Wyoming, implementation “is not going to happen overnight,” said Dan Noble, director of the Wyoming Department of Revenue. The state has two pending lawsuits regarding the legislation, including one with Wayfair.

“We’ve got to get past this issue of litigation first,” Noble told Bloomberg Tax.

The main concern—physical presence—was decided by the Supreme Court. But the question is whether companies will raise the burden issue as a secondary claim, Noble said.

There are other logistical issues that take time. Current staffing would be overwhelmed with registrations from businesses, he said.

For now, the state will work with companies to voluntarily collect the taxes.

The Streamlined Sales Tax Governing Board Inc. is working with its 24 member states on messaging and implementation, Executive Director Craig Johnson said. The group is also reaching out to non-members to offer services.

Johnson said he expects a number of states to start down the path of joining by the end of the year. Specifics, though, depend on individual legislatures.

“It’s going to take time for states to join,” Johnson told Bloomberg Tax.

One highlight of the organization is a common application for sellers to register with states. That’s the first thing businesses have to do, which means it’s convenient to fill out one application for two dozen states, Johnson said.

‘No One Will Understand’

States should try to provide clarity for both buyers and sellers, panelists said. Galle raised the issue of states that have minimum transaction thresholds to collect taxes.

That could be confusing in marketplaces with individual vendors. Customers may not understand if transactions are aggregated by platform or by seller to determine if they owe taxes.

“I suspect that no one will understand that,” Galle said.

Galle also suggested that customers be alerted to the taxes owed while they’re browsing and not just at checkout.

Retailers are also raising questions about implementation and compliance since the court decision, said Rachelle Bernstein, vice president and tax counsel at the National Retail Federation. Retailers are looking for centralized information on which states are starting to collect taxes and when, she said, as well as how to register.

Businesses are also are looking for simplicity in compliance, Bernstein said. They need to know when to collect taxes during sales to avoid paying later.

“It’s coming out of your bottom line,” she said.

To contact the reporter on this story: Brenna Goth in Lake Tahoe, Nev., at

To contact the editor responsible for this story: Ryan C. Tuck at

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