THE WRIN­KLES OF WAYFAIR

Tak­ing a closer look at the state and lo­cal tax ram­i­fi­ca­tions of the Supreme Court de­ci­sion

Accounting Today - - Front Page - By Roger Rus­sell See WAYFAIR on 13

The U.S. Supreme Court’s June 21, 2018, ruling in Wayfair con­cluded that states can im­pose sales tax-col­lect­ing re­quire­ments on out-of-state re­tail­ers, even those that do not have a phys­i­cal pres­ence in the state.

The court ad­dressed South Dakota’s direct chal­lenge to Quill, the 1992 de­ci­sion that es­tab­lished the phys­i­cal pres­ence test for sales and use tax nexus. South Dakota’s chal­lenge lay in the en­act­ment of an eco­nomic nexus test that re­quires re­mote sell­ers, with­out a phys­i­cal pres­ence in the state, to col­lect sales tax if cer­tain gross rev­enue or trans­ac­tion thresh­olds were met — more than $100,000 of goods sold or 200 trans­ac­tions. In Quill, the court held that a state could not re­quire an out-of-state seller to col­lect sales tax on a sale to a res­i­dent of the state. That de­ci­sion pre­dated the surge of on­line sales, and since then states have been look­ing to find con­sti­tu­tional ways to col­lect tax rev­enue from re­mote sell­ers.

The de­ci­sion, writ­ten for the ma­jor­ity by Jus­tice An­thony Kennedy just be­fore his re­tire­ment, left some unan­swered ques­tions.

“Ba­si­cally, the only real hold­ing by the Supreme Court was that the state is not limited to phys­i­cal pres­ence when try­ing to im­pose sales and use tax col­lec­tion re­spon­si­bil­ity,” said Chuck Moll, head of the na­tion­wide state and lo­cal tax prac­tice of law firm Win­ston & Strawn. “There are lots of unan­swered ques­tions, some of which will be an­swered on re­mand.”

The de­ci­sion does not ad­dress retroac­tive ap­pli­ca­tion of the col­lec­tion re­quire­ment other than to note fa­vor­ably that South Dakota’s statute was drafted to be prospec­tive only. “Un­doubt­edly, other states will try to im­pose retroac­tiv­ity,” he pre­dicted.

The new stan­dard used by the court is a “sig­nif­i­cant quan­tity of busi­ness,” noted Moll. “My guess is that on re­mand the lower court will find that this par­tic­u­lar plain­tiff ex­ceeded those thresh­olds. We will see other states fol­low South Dakota and use the same thresh­olds, but other states might use lower or higher num­bers,” he said.

Some states, ex­pect­ing the out­come, have al­ready en­acted leg­is­la­tion sim­i­lar to South Dakota’s, ac­cord­ing to Va­lerie Dick­er­son, na­tional mul­ti­state tax leader at Big Four firm Deloitte.

“A num­ber of states have an­tic­i­pated the ruling due to Jus­tice Kennedy’s re­marks,” she said. “Those states that are within the mit­i­gat­ing fac­tors will now de­cide how to pro­ceed with col­lect­ing the tax. The ma­jor­ity de­ci­sion al­lows for the pos­si­bil­ity that there may be some types of tax­pay­ers with other bur­dens or rea­sons to lit­i­gate fur­ther — a sign that the door is not shut on fu­ture chal­lenges.”

“In the mean­time, com­pa­nies en­gaged in e-com­merce may have to re­vise their busi­ness mod­els, their IT sys­tems and their in­ter­nal pro­cesses for cal­cu­lat­ing their tax obli­ga­tions,” she con­tin­ued. “One key ques­tion is whether they have the re­quired cus­tomer data to de­ter­mine how to prop­erly source sales.”

Dick­er­son be­lieves that the states will take into ac­count the com­pli­ance hard­ships faced by smaller firms and mom-and-pops. “Hope­fully, states will take a rea­son­able ap­proach and fac­tor in small-busi­ness bur­dens,” she said.

Brian Kel­ley, man­ag­ing di­rec­tor of state and lo­cal tax ser­vices at Top 100 Firm Si­kich, agreed: “Most states will be rea­son­able. In fact, a lot have al­ready en­acted leg­is­la­tion sim­i­lar to South Dakota’s, and more will fol­low.”

“Don’t panic,” he ad­vised. “It’s not nec­es­sar­ily a sit­u­a­tion where a small or medium-size busi­ness will have to go out and reg­is­ter in ev­ery state. To the ex­tent they don’t have that many trans­ac­tions, the safe har­bor in most state leg­is­la­tion may mit­i­gate the bur­den.”

‘Good luck with that!’

Al­though there was noth­ing about pro­tect­ing small busi­ness in the ac­tual hold­ing of the Wayfair de­ci­sion, it did have a lot of vague ideas on the sub­ject, ob­served Dean Zerbe, al­liant­group’s na­tional man­ag­ing di­rec­tor and for­mer se­nior coun­sel with the Se­nate Fi­nance Com­mit­tee. “Good luck with that! I don’t think states will show a re­strain­ing hand,” he said.

“Right af­ter they have sales tax nexus, they’ll try to ex­tend it to busi­ness ac­tiv­ity tax,” Zerbe pre­dicted. “You’re here for sales tax — guess what? You’re also here for BAT,” he said. “Noth­ing makes states hap­pier than tax­ing peo­ple that don’t vote or live there.”

The de­ci­sion paves the way for the “big boys” to get even big­ger, sug­gested Zerbe. “It’s a chance for them to crush their small and medium-size com­peti­tors. Congress will re­ally need to lis­ten to the smaller re­tail­ers, and step in to pro­tect them. They need to set a stan­dard safe har­bor.”

With the vastly in­creased rev­enue that will come into state cof­fers, will they now lower their rates? Not likely, Zerbe in­di­cated. “Most will say ‘Hot dog! We have plenty of ideas on what to do with this.’”

“This is all be­ing thrown back to Congress,” said Jeff Co­hen of Top 100 Firm Grassi & Co. “Tech­nol­ogy has re­placed the sales per­son with the brief­case and brochures. Congress will have to look at it and set a uni­form stan­dard, or we’ll go back to the Wild West. It’s back to where we started, just a dif­fer­ent kind of crazy.”

Co­hen cau­tioned that the obli­ga­tion to col­lect and re­mit “pierces the cor­po­rate veil.”

“There is no cor­po­rate pro­tec­tion,” he said. “With­hold­ing is a per­sonal li­a­bil­ity. Any­time you have fed­eral or state with­hold­ing on be­half of a govern­ment agency, there’s no cor­po­rate pro­tec­tion. They’ll just sell your house for you, but you can keep your un­der­wear.”

“Even if the state pro­vides the soft­ware, you have to match it with the ERP sys­tem cur­rently in use, to phys­i­cally start re­mit­ting each and ev­ery trans­ac­tion on a quar­terly ba­sis,” he said. “That’s a big chal­lenge. It gives ex­po­sure to hid­ing the money — you have to track and mon­i­tor and make sure all the money is go­ing to ex­actly where it’s sup­posed to go. You might have in­ter­nal ac­coun­tants tak­ing a lie de­tec­tor test.”

An is­sue left un­de­cided is how low a nexus thresh­old would still be con­sti­tu­tional, noted Eric Fader, man­ag­ing di­rec­tor of sales & use tax at Top 7 Firm BDO. “We’ll see state as­sem­blies gen­er­ally en­act­ing leg­is­la­tion sim­i­lar to South Dakota’s, be­cause the Supreme Court said that $100,000 or 200 trans­ac­tions does not cre­ate an un­due bur­den. But we’ll also see states, in time, see if they can test the wa­ters and have a thresh­old below South Dakota’s thresh­old.”

The process of en­act­ing leg­is­la­tion and set­ting up pro­ce­dures — for both the states and busi­nesses — does not hap­pen overnight, ob­served Brad Weis­ert, a tax ser­vices part­ner at OUM & Co. “There will be a pe­riod of time when it will be un­clear whether a state has stepped over the Wayfair line, un­less Congress passes the

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