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New York policymakers are taking a close look at the U.S. Supreme Court’s landmark online sales tax decision in South Dakota v. Wayfair, but it’s unclear what steps, if any, the state will take in light of it.
The most likely step, if the state were to make any changes, is to change its standard for taxing online sales from its current physical presence nexus standard to an economic nexus standard, tax law professors say.
The Supreme Court’s ruling in Wayfair overturned precedent that effectively prohibited states from imposing sales tax obligations on retailers that lack an in-state physical presence. The case challenged the physical presence nexus standard set forth in Quill Corp. v. North Dakota.
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.
About $1.8 billion in online and mail order sales were reported to New York in the third quarter of last year, according to data from the state Division of the Budget. Those sales didn’t include online sales by brick-and-mortar retailers like Wal-Mart Stores Inc.
R. Gregory Roberts, a partner at Reed Smith LLP, said the Wayfair decision left a number of unanswered questions, particularly regarding application of the Constitution’s due process and commerce clauses.
A spokesman for the state Department of Taxation and Finance declined to comment on the Wayfair decision, saying it was under review.
“I think that they should issue some guidance,” Roberts told Bloomberg Tax. “The true impact of the decision remains to be seen. There’s still a lot of questions.”
Edward A. Zelinsky, the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law at Yeshiva University, said New York and other states should use the South Dakota statute as a model, now that the Supreme Court has provided a road map suggesting what will pass constitutional muster.
“That would be the simplest and most direct way to tax internet interstate sales,” Zelinsky told Bloomberg Tax.
The 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. 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.
Richard Pomp, the Alva P. Loiselle professor of law at the University of Connecticut School of Law, said the Wayfair decision wouldn’t have an immediate impact on New York because the state doesn’t have an economic nexus model.
“If New York is going to adopt Wayfair, the Legislature is going to have to do it through statutory changes,” he told Bloomberg Tax.
The state Legislature isn’t scheduled to convene until January 2019.
Both Pomp and Zelinsky were among the law professors who signed a friend-of-the-court brief in support of South Dakota in Wayfair.
How the decision impacts Gov. Andrew M. Cuomo’s (D) proposal to tax online marketplaces is one of the key questions in New York.
Cuomo has proposed a requirement that marketplace providers collect and remit sales tax when they facilitate a sale to New York residents, but the measure failed to pass the Legislature for three straight years. The proposal would generate some $159 million a year, according to the governor’s 2018-2019 proposed budget.
In February, Amanda Hiller, the tax department’s deputy commissioner and counsel, told a legislative hearing that the state would like to move forward with its plan to impose sales tax collection responsibility on online marketplace providers regardless of the outcome of the Wayfair case.
She said the outcome of the case shouldn’t impact the state’s plan because New York is only going after marketplace providers that already have nexus to the state. “We still think that the marketplace proposal is the right proposal for managing the collection of sales tax from these large online marketplaces because that’s where the money is collected,” she said. “It’s Amazon that is taking my credit card, that is billing my credit card for the sale. It’s not the third-party vendor whose goods are in an Amazon warehouse.”
Zelinsky said there is no longer a need for marketplace taxes, click-through taxes, or reporting regimes because Wayfair eliminated the physical presence test established in Quill.
“These are ways to nibble around the edge of Quill and the physical presence test,” he said. “There might be some continuing momentum, but you don’t have to physically nibble around something that doesn’t exist anymore.”
Brick-and-mortar stores and local governments will nevertheless continue to push for passage of the marketplace tax.
“With the Supreme Court overturning the outdated physical presence test, the New York State Legislature must immediately approve legislation authorizing the fair sales tax treatment of all retailers in New York, whether they operate remotely or in our communities,” Peter A. Baynes, executive director of the New York Conference of Mayors, said in a statement.
“Doing so will foster property tax relief and local commerce in our cities and villages,” he said.
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