The immediate consequences
Many states already have legislation on the books with different effective dates, which can be described as “economic presence” laws because they have some “volume of economic activity” requirement to establish nexus, just like the South Dakota statute. However, the immediate issue is the effective date for collecting the tax, which varies with each state. For example:
States like Hawaii and Vermont have July 1, 2018, effective dates and have already made announcements to use “catch up” procedures for transactions in 2018 before the Wayfair decision.
Kentucky and Iowa, on the other hand, have announced that taxes will be collected on a “prospective” basis, with Iowa saying specifically Jan. 1, 2019.
Idaho announced that it is “still reviewing” next steps.
Ironically, South Dakota must wait while the case is being wrapped up in the state court system on remand, so the injunction preventing the enforcement of the law will remain in place.
The Minnesota Department of Revenue will provide more guidance within 30 days.
Louisiana will require remote retailers to collect sales and use tax if they meet certain sales thresholds. The thresholds apply to tax periods on or after the date of the Wayfair decision.
Illinois, Wisconsin and Alabama will require remote retailers to collect use and service use tax when they meet certain sales thresholds. This collection requirement begins Oct. 1, 2018.
Indiana will not enforce the law retroactively and will soon provide a specific date for enforcement.
Bottom line: State-specific guidance is being announced almost daily, and recommendations from groups like the National Conference of State Legislatures, the Multistate Tax Commission and the Streamlined Sales Tax Governing Board are forthcoming as well — all of which should be tracked carefully by retailers and their tax advisors.
The long-term consequences
Physical presence may no longer be a necessary element of sales tax nexus, but that doesn’t mean issues in this area will be greatly simplified. Once you eliminate the physical presence requirement, it opens up so many other things.
It’s a win for the states, particularly the smaller, less populous states with fewer brick-and-mortar retailers. But states like New York and California, which have very complex statutes on the books, will have to make some significant changes to their laws.
Wayfair has an especially important impact, particularly on those states that don’t impose state and local income taxes, because it’s their primary source of tax revenue.
New Hampshire is a state without a sales tax. According to a recent announcement, the governor plans to call a special session to consider legislation to protect New Hampshire businesses from improper attempts by other states to force collection of sales and uses taxes.
In addition, senators from two other “non-sales tax states” (Oregon and Montana) have joined the senator from New Hampshire to introduce federal legislation (Senate Bill 3180) titled, “A bill to regulate certain state impositions on interstate commerce” in an effort to overturn the U.S. Supreme Court’s decision in Wayfair.
It remains to be seen what the states will actually do, but state governments and their taxing authorities are well advised to adopt the economic presence nexus standard along lines similar to the South Dakota statute, which specifically requires only a certain volume of economic activity measured by either amount or number of sales in the state.
It’s a safe bet that if states follow the South Dakota model, they won’t be challenged by taxing authorities, tax advisors, retailers or anybody else.
It will take most states months to get their collection systems up and running. This is not likely to take place until January 2019 for many jurisdictions. A key feature of the South Dakota law was that there would be no retroactive imposition of sales tax on e-commerce sellers. Theoretically, states can impose sales tax retroactively as far back as 10 years, but most states would not go in that direction, because it would be challenged.
More legislative action?
There will be a lot of pressure for Congress to step in and simplify the sales tax collection and compliance process by providing one set of rates and standards that apply to all states that impose the sales tax. Several states that don’t currently impose a sales tax are actively considering doing so now that they effectively have been given a “safe harbor” to do so on e-commerce. Tax advisors and retailers, in particular, take note.
Although the Wayfair decision only applies to sales and use tax for the moment, there are some commentators who suggest that Wayfair may eventually be extended to other types of income, such as corporate income tax.
Whether the states will repeal or retain some of the other alternative nexus laws, e.g., cookie nexus, reporting/ notice laws, click-through nexus, etc., currently on the books is an open question. State legislative actions over the coming weeks will have to be monitored carefully.
Next steps for retailers
To ensure that businesses will stay sales and use tax-compliant with the expanded nexus standards and minimize risks to their businesses, best practices should be put in place:
Understand their nexus profile — where do they have a sales tax obligation based on evolving standards?
Assess their capability to accurately, consistently and efficiently meet their obligations. AT
Mark Friedlich, Esq., CPA, is a senior director for tax & accounting for North America for Wolters Kluwer.