Will the Wayfair Decision Reinvent Online Taxes?
Everyone has an opinion as to which way the Supreme Court justices will rule in South Dakota v. Wayfair et al [1] but it all boils down to (a) Quill[2] will be upheld; (b) Quill will be overturned; or (c) SCOTUS will rule somewhere in between. Business needs a bright line test upon which to base budgets, business strategies and financial reserves. SCOTUS is limited to interpreting the law and the U.S. Constitution. Only Congress and state legislatures can translate law into rules-based action.
In oral arguments,[3] the Court seemed frustrated at the lack of consistent data and information. South Dakota and the U.S. Department of Justice agree that one sale could create nexus.[4] South Dakota argued that Congress didn’t act in the last twenty-six years;[5] Wayfair said it did.[6] South Dakota stated the “burden” of compliance to small sellers was minimal;[7] Wayfair said it was substantial.[8] South Dakota wanted Quill overturned;[9] Wayfair wanted it upheld;[10] and the U.S. Solicitor General wanted it clarified.[11] One of the most telling exchanges in the oral arguments was between South Dakota Attorney General Marty Jackley and Associate Justice Stephen Breyer, when Breyer stated: “When I read your briefs, I thought, ‘absolutely right.’ And then I read through the other briefs, and I thought, ‘absolutely right.’ And you cannot both be absolutely right.”[12]
If Quill is upheld without further interpretation of its limits by SCOTUS, the states will continue to aggressively push the envelope of sales tax nexus and their understanding of physical presence. The state law nexus standards will continue to expand as they already have in Alabama (“Economic Nexus”),[13] New York (“Amazon Nexus”),[14] Ohio (“Cookie Nexus”),[15] and Texas[16] (“Remote Worker”). However, overturning Quill will put small sellers on equal footing with Fortune 100 companies, but without the same resources to comply with the laws of 46 states and their 14,000 local taxing jurisdictions. Placing too much faith in software as the “silver bullet”[17] for a fundamental business practice is risky, since the seller remains legally and financially liable for any sales tax errors.
SCOTUS can provide guidance with its rules of law and once again encourage Congress to act. Should Congress choose to act, it could be a slow process considering as Quill was enacted 26 years ago. Regardless of the outcome in Wayfair, Congress will likely need to clearly define nexus-creating activities and what should be a minimal sales dollar and volume threshold. Congress has roadmaps. The basic sales tax issues brought forth in Wayfair have not materially changed since the 1999-2002 time period, when three different groups identified the problems and recommended solutions. Congress does not need to “reinvent the wheel”: they just need to create law to move it forward.
In 1999, for instance, the National Tax Association, Communications and Electronic Commerce Tax Project (the ‘‘NTA Project’’), an ad hoc consortium of business, state and local government, professional organizations and academia issued the NTA project report,[18] despite having failed to reach consensus on sales tax and telecommunications tax reform among its members. The NTA Project identified the sources of complexity as tax rates, tax base and tax administration. They made the following recommendations: (1) one tax rate per state, eliminating local option tax; (2) uniform definitions of products and services for sales tax purposes, including taxation specified by standard product classification codes used in commerce; (3) standardized business purchase definitions to ensure the legitimacy of business exemptions; and (4) sourcing solely at the state level based upon use or destination to the extent information is available.
Concurrently and successively, the Streamlined Sales Tax Project (SSTP) was formed through actions by the National Governors Association (NGA) and the National Conference of State Legislatures (NCSL). They recommended the development of a sales tax system that was (1) less complex; (2) addressed the lack of a level playing field for in-state vs. remote merchants; and (3) addressed the loss of revenue from states unable to collect tax imposed. The initial Streamlined Sales and Use Tax Agreement (SSUTA)[19] was drafted in November of 2002 with the stated purpose of a tax system having (1) state level administration; (2) uniform state and local tax bases; (3) uniform tax base definitions; (4) simplified rates; (5) uniform sourcing; (6) simplified administration; and (7) privacy protections.
Congress established the Advisory Commission on Electronic Commerce (ACEC),[20] which issued its report in April 2000 proposing: (1) clarification of nexus standards for remote sellers; (2) drafting of uniform sales and use tax law to simplify taxation and promote parity between remote sellers and single jurisdiction sellers; (3) establishing a new advisory commission responsible for oversight of progress to create uniform tax law; and (4) making the Internet Tax Freedom Act (ITFA) permanent.[21] Of these four goals, only ITFA was made permanent in February 2016.
The ideas put forth by all three groups remain relevant to the issues argued in Wayfair. Hopefully, this time the SCOTUS decision, Congressional action and state law will promote parity between the state’s imposition of a tax-collection responsibility upon businesses with the government-derived benefits from being a corporate citizen in that state. After all, since “those who cannot remember the past are condemned to repeat it,”[22] let’s just hope we do not have to reinvent this wheel yet another time.
[1] South Dakota v. Wayfair, Inc. Case 17-494.
[2] Quill Corporation v. North Dakota, 504 US 298 (1992).
[3] Transcript of Oral Argument, South Dakota v. Wayfair, Inc., et al. April 17, 2018.
[4] Ibid. Page 6 Line 11, Page 22 Lines 9-25.
[5] Ibid. Page 13, Lines 15 – 19.
[6] Ibid. Page 40 line 6- 25 and Page 41 Lines 1-7.
[7] Ibid. Page 8 Line 5-6 and Page 58 Line 17.
[8] Ibid. Page 34 Line 1-11.
[9] Ibid. Page 10 Lines 1-12.
[10] Ibid. Page 43 Lines 13-22.
[11] Ibid. Page 19 lines 3-9.
[12] Ibid. Page 15 Lines 2-6.
[13] Ala Code Sec. 40-23-68 ; Ala Admin Code r. 810-6-2-.90.01.
[14] Sec. 1101(b)(8)(i), Tax Law ; Reg. Sec. 526.10(a).
[15] Sec. 5741.01(I), Ohio R.C. ; Sales and Use Tax Information Release ST 2001-01, Ohio Department of Taxation, August 2016.
[16] Sec. 151.107, Tax Code, Letter No. 200611818L, Texas Comptroller of Public Accounts, November 16, 2006.
[17] Ibid 3, Page 45 Lines 20-25 and Page 46 Lines 1-13.
[18] National Tax Association, Communications and Electronic Commerce Tax Project, Final Report, Sept. 7, 1999.
[19] Streamlined Sales and Use Tax Agreement, adopted Nov. 12, 2002.
[20] The Advisory Commission on Electronic Commerce was established pursuant to P.L. 105-277, Div C, Title XI Stat. 2681-719, and codified as 47. U.S.C.S. §151 Sec. 1102 (H.R. 4328).
[21] Advisory Commission on Electronic Commerce, Report to Congress, April 2000.
[22] George Santayana.
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