Wayfair Case Not ‘Slam-Dunk’ States Hoped For: Tax Group Official

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By Tripp Baltz

The pending digital sales tax case before the U.S. Supreme Court may turn out to be an example of being careful what you hope for, a Multistate Tax Commission attorney said.

“Most of us on the state tax side came in thinking, this is a no-brainer,” MTC Counsel Bruce Fort said April 24. Fort noted that in earlier rulings, current justices essentially invited the states to bring a case like South Dakota v. Wayfair—which challenges the 1992 decision in Quill Corp. v. North Dakota barring states from requiring remote retailers to collect sales tax. The Supreme Court heard oral argument April 17, and practitioners expect the high court will issue a decision by late June.

“It’s ironic that once it actually got in front of the court, they expressed an extreme reluctance to do anything,” Fort said, speaking during the MTC’s Audit Committee meeting in Bloomington, Minn. “Clearly they’re not anxious to rule on this case.”

The high court’s questioning of South Dakota “seemed to indicate a pushback” against the notion that the court “legislate a solution here,” Fort added.

Unanticipated Reluctance

“States did not anticipate how much reluctance there would be on the court’s side to essentially legislate a solution to this 40-year-old problem,” Fort said.

Additionally, the justices were “extremely frustrated by the lack of a record, because you could make arguments on both sides,” he said, adding that “everyone who was there thinks it will be a split decision” and not the “slam-dunk” states were hoping for.

Many states have been so focused on overturning the Quill decision that they perhaps overlooked the fact that the state sales and use tax systems are flawed—and there’s an urgent need to simplify them to reduce the burden for companies, Karl Frieden, vice president and general counsel of the Council On State Taxation, said before the MTC’s Litigation Committee.

“I would argue we have one of the worst in the world,” Frieden said. “It’s music to our ears that, if you get the decision you’re wanting, you’re going to do it in way that doesn’t lead to retroactivity, it should be prospective, it should have certain certain thresholds” for annual sales.

Marketplace Sales

After Wayfair, the next big tax issue involves marketplace providers, Fort said.

Washington state, Minnesota, Pennsylvania, and Rhode Island enacted the first marketplace-provider regimes in 2017. Amazon has announced its agreement to collect in Washington and Pennsylvania.

Alabama and Oklahoma also enacted legislation this year. And a handful of other states have pending marketplace measures—including Hawaii, Kansas, and Washington.

On the litigation front, Amazon sued South Carolina in July 2017 over an assessment by the state that the online retail giant is responsible for $12.5 million in uncollected taxes, interest, and penalties for sales involving third-party merchants on its marketplace platform. Fort said a hearing likely will be held by the end of the year.

Most state statutes say “if you sell something, and you’re taking the money, and providing it to your customer, you’re selling it,” Fort said. “South Carolina did what I would argue is a common sense interpretation of their statute, that Amazon is a vendor, not only for their third parties, but for their own wares.”

‘Can’t Imagine Larger Case’

When Amazon first started making agreements with states to begin collecting and remitting taxes on remote sales of its own goods, third-party transactions constituted about 20 percent of its sales, Fort said.

Now third-party marketplace transactions are more than 50 percent of sales on Amazon, Richard Cram, director of the MTC’s National Nexus Program, said.

The South Carolina ruling could have implications in other states, since South Carolina’s law isn’t any broader than that of other state laws, Fort said. “I can’t imagine a larger case than this,” he said.

To contact the reporter on this story: Tripp Baltz in Bloomington, Minn., at abaltz@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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