The U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair, Inc, on April 17th, leading to an immediate surge in discussion, analysis, and general chattering among tax professionals.
Since the case has the potential to drastically reform the legal framework of when businesses — in particular remote sellers and e-retailers — need to collect and remit sales tax, all that chatter is well justified (more can be read on Wayfair and what it could do here). And we at Sovos, as a leading provider of sales tax compliance solutions, felt the need to join in.
In a webinar, “South Dakota v. Wayfair and What It Means For eCommerce,” Chuck Maniace, the Director of Regulatory Analysis for Sovos, discussed his take on what the oral arguments revealed about the Justices’ thoughts, what the effects that their decision could have, and how businesses should prepare now. This post provides a brief summary of the webinar; if you want to hear it in its entirety, you can do so here.
What Happens Next?
Chuck began the webinar with the obvious first question: what is the Court going to do?
Unfortunately, as Chuck explained, that is unclear. It’s a fool’s errand to predict the Court, and whatever amount of certainty there was before oral arguments that the Court would rule in favor of South Dakota quickly evaporated as the Justices asked their questions.
That leaves us with a very matter of fact course of upcoming events: the Justices will convene and discuss the case; they will take several votes until they arrive with a clear majority for a decision; then there will be several weeks as the assigned Justice (or really, their clerks) write up a decision to be published likely in late June.
Other Justices have the opportunity to write their own concurring or dissenting opinions, but these will only provide flavor. Only one opinion will reflect the unified decision of the Court’s majority and set out the prevailing understanding of sales tax liability. What this opinion will say is currently anyone’s guess. But Chuck did predict that when it is published, accounting houses, tax attorney firms, and even software companies will go silent for a few hours as everyone pours over its contents.
How Might Sellers Be Affected?
At the heart of any decision in Wayfair is what will the impact be on remote sellers, and much of Chuck’s presentation discussed the considerations, implications, and considerations of the implications that will affect the Court’s decision.
While eCommerce sellers are most commonly mentioned in Wayfair commentary, any remote seller, even those in foreign countries, could find themselves with vastly more sales tax liability if the Court rules for South Dakota and overturns Quill. (Quill was the 1992 case where nexus rules were last discussed by the Court, cementing since then the physical presence standard for establishing nexus, and a business’s tax liability.)
One potential point of danger for businesses is the issue of owing back taxes if the Court rules for South Dakota. The danger would be that a state would claim that a business’s tax liability extended to all sales they’ve made in the state, reaching back to the beginning of time. While this wasn’t immediately at issue in Wayfair because South Dakota’s challenged law explicitly denied any right for the state to claim back taxes (as have many other states that have signalled they’ll pass similar laws if permitted), it was a very real concern that caught the Justices’ attention.
However, as Chuck noted, what is more pressing for businesses is that the Court’s decision will be immediately valid, and many states have already passed laws similar to South Dakota’s, which are due to take effect if the Court finds for South Dakota. That means that a business could find itself with sales tax liability in many more jurisdictions from one moment to the next.
Remote sellers should take action today so they don’t get caught flat footed if the Court rules for South Dakota.
Are The States Prepared?
One of the clearest potential problems with expanding nexus rules, is that businesses will be faced with having to comply with numerous tax jurisdictions and their various rules, rates, and definitions. (The number cited in oral arguments was over 12,000 different tax jurisdictions.) As such, a major concern for the Justices was, has there been any effort to simplify this situation.
Chuck marked that, while both sides in the oral arguments made good points, neither side could clearly prevail.
South Dakota pointed out the Streamlined Sales Tax Project (SSTP), which 24 states have joined onto. The SSTP has provided very streamlined tax payer registration processes and simplified tax returns and rates, and has published clear and uniform taxability rules so sellers can know what is taxable where.
However, while SSTP has done a lot of work to ease the compliance burden, Wayfair would note that those 24 states are actually a pretty limited list, not including places like California, New York, and Pennsylvania. Most states, especially many of the biggest of them, have done very little, if anything, then, to prepare for national sales tax collections. In this view, SSTP, while it signals the right direction, is incomplete for all that remote sellers may need.
Is Software The Solution?
One of the issues that vexxed the Court in oral arguments was, if they did elect to overturn Quill, what help would there be for remote sellers whose sales tax liability would, in an instant, explode. As Chuck remarked, the Court was unable to get a clear answer one way or the other.
South Dakota claimed that free, easy, and readily available software solutions could solve all tax compliance problems for even the smallest retailers. Wayfair, instead, argued that, while software systems were out there, it could cost tens, even hundreds, of thousands of dollars a year, and still require a great deal of concerted effort by the business to manage these systems.
In the oral arguments, Justice Breyer noted that he was torn by this issue when reading the associated briefs. Each side’s position was stated so clearly and convincingly that he alternatively agreed with both — but both were also so opposed that they couldn’t both be true.
In the webinar, Chuck argued that both South Dakota and Wayfair did themselves a disservice by being so determinative in their arguments. Had Wayfair accepted that cheap and user-friendly services were available, with South Dakota also acknowledging that software was not a perfect, costfree solution, then the Court would have had a more realistic picture of both the potential opportunities and burdens that anyone using software will encounter.
As a leading provider of tax compliance software solutions, Taxify by Sovos, is obviously an interested party in these issues. We encourage all remote sellers facing a potential surge in their tax liability to contact us to hear more about how we can help. That said, we also acknowledge that, while largely affordable and user-friendly, the smallest of remote sellers will still be challenged to fully comply with nationwide tax liability, a condition that we hope the Court will respect in its decision.
What Should We Do? What Can We Do?
At the end of the day, the most salient issue is the call to action. To this, Chuck made clear that, whichever way the Court may decide, it is absolutely necessary for remote sellers to get prepared today.
If the Court rules for South Dakota and overturns Quill, then remote sellers could face an instant expansion in their sales tax liability. Currently, more than a dozen states have economic-type nexus rules, which would become enforceable if the Court determines that Quill’s physical presence rule was no longer the prevailing standard for nexus. Businesses selling to these states would suddenly have tax obligation on their sales there. But many other states would almost certainly pass their own economic nexus rules in the following months, if not weeks.
And even if the Court upholds the Quill physical presence nexus standard, remote sellers will still face expanding sales tax liability as states continue to pick around the edges of what physical presence means. We can fully expect more states to follow, for instance, New York with Click-Through nexus or Massachusetts with Cookie nexus.
Alternatively, Notice-and-Report requirements, which the Supreme Court previously ruled do not technically establish sales tax liability, and are therefore perfectly legitimate, are also likely to spread. Ever since Colorado first got this scheme working in 2016, many other states have passed similar requirements.
With these type of bills becoming more prevalent, remote sellers’ tax liability is inexorably increasing even without the Court overturning Quill. The burdens of compliance only get heavier the later a business waits to get their house in order; reviewing their sales markets, understanding the nexus rules of the states they sell to, and cataloging all these data are necessary steps that all remote sellers should undertake today.
Underlining all of this, however, was the specter of Congress, and what it may do to establish — or prohibit — a national sales tax scheme. It is fully within Congress’ power to set up nexus standards for interstate sellers, including setting up minimum sales thresholds and even possibly standardized rates and collection processes. That it has not yet acted could mean that Congress approves of the status quo — or it could reflect the seeming unending partisan gridlock on Capitol Hill.
Still, interested citizens would do well do contact their Representatives or Senators and express their concerns, thoughts, and desires. Ultimate, only voters can compel legislators to do something, but they have to actually speak up if they want to be heard.
Be prepared for whatever changes are made to existing sales tax legislation with Taxify by Sovos.