The Wayfair Decision – “Do They Have Just What They Need?”

Our distinguished panel of national experts examined the Supreme Court’s Wayfair ruling, its implications, and what it means for large business, small business, marketplace providers, and state and local governments.

After decades of waiting less than patiently, Godot finally arrived in black robes.  With the Supreme Court’s landmark 5-4 decision in Wayfair v. South Dakota, the physical presence standard for collecting sales taxes was struck down.  This moment, long-anticipated by both governments and many businesses, has opened the front door to state taxation of remote sales and e-commerce.

The Wayfair company jingle is “You’ve got just what I need.”  So did the Court’s Wayfair decision deliver what businesses and governments need with respect to policy, compliance and implementation matters surrounding the taxation of e-commerce?  To find out, our annual meeting brought together individuals who have been on the frontline of this issue for many years.  Moderated by former MCFE president Sue Haffield, our panelists included Doug Lindholm, President and Executive Director, Council on State Taxation; Harley Duncan, Managing Director, KPMG, Washington D.C.; Craig Johnson, Executive Director, Streamlined Sales Tax Governing Board, Inc; and William Lasher, Senior Director, Indirect Taxes, eBay, Inc.

Understanding the Big Picture

Panelists were asked to start by offering their summary of the decision, the key takeaway, and its implications from four different perspectives.  Taking the large business perspective, Doug Lindholm noted his organization represents large taxpayers on all sides of this issue and sympathized with the predicaments everyone has expressed.  Wayfair successfully leveled the playing field for large brick and mortar retailers who saw profit margins eroding because of the sales tax disparity.  At the same time, burdens do exist with respect to remote sales tax collection even among larger businesses because “any sales tax person will tell you that technology is not the sole answer to the myriad burdens of collecting.”

But perhaps the biggest takeaway for big business, he noted, is the window of opportunity that now exists to address an underappreciated source of U.S. competitive disadvantage – the inefficiency and complexity of our system of consumption taxes.  By any measure, the United States has the most complex and burdensome sub-national consumption tax system in the world.  U.S. business labors under the complexities and burdens created because 46 states and countless localities impose disparate tax systems – unlike the more efficient consumption tax systems found in other countries.  This, he argued “is not just a U.S. issue; it’s a global issue.”  As more and more economies look to consumption taxes to raise revenue, it’s becoming more and more imperative to increase uniformity and efficiency and reduce compliance burdens.  States might reap some extra revenues as a result of the decision itself, but the biggest economic benefits would come from redoubling efforts towards collaborating with other states on a uniform system.

In offering a small business perspective, Harley Duncan first observed that the perception of what constitutes “small” is in fact very small.  He noted that South Dakota’s de minimus threshold of 200 transactions would represent only one-tenth of 1% of households in that relatively small state.  As a result, the ruling effectively casts a very broad net and will bring in a lot of quite small companies doing modest business in the state.  The biggest challenge for these small businesses, he argued, will be tracing and sourcing sales and rates to local jurisdictions.  He continued, noting that his firm has estimated that a business that now has economic nexus everywhere will need to file, on average, 100 sales tax returns per month with various government entities.  That’s both difficult and expensive and also raises issues of whether they will be able to scale up to submit many more returns without a serious investment in technology.  He suggested those realities “could deserve some accommodation.”

Representing the states’ perspective, Craig Johnson declared the Wayfair decision not just a “huge, huge victory” for states but also a major validation for the Streamlined Sales Tax (SST) initiative.  States want e-commerce businesses to succeed but also want a level playing field.  He noted that collection authority, given the Court’s ruling, demands simplification, ease of administration, and access to all the information and tools necessary to comply.  SST was created specifically to accomplish those objectives and in fact was recognized in the Court’s ruling for its efforts to prevent triggering undue burden.  “It’s a big win for member states” he said, but he was unsure what it means for non-member states.

From a marketplace provider perspective, William Lasher argued the Wayfair decision itself had little direct impact.  He noted the ruling was silent on the marketplace provider issue; rather, it’s been the growing numbers of state marketplace provider rules driving their actions.  Nevertheless, as a self-described “sales tax guy at a place that doesn’t sell anything” Lasher emphasized the symbiotic relationship that exists between eBay as a provider and its sellers, which includes helping their sellers in navigating this new world.  The curveball is that under these state marketplace provider laws, “our nexus not their nexus” is in play.  He also noted the Wayfair decision did not have any effect on their talking points with respect to federal action, arguing there is a continuing need for federal action on simplification.

Unanswered Questions / Unresolved Issues

Around the country more than 30 states have come out with guidance on enforcement dates, and in Minnesota, enforcement of the state’s e-commerce and marketplace provider laws just began on October 1.  As states prepare for the implementation and enforcement of these laws what are some of the practical (and perhaps unexpected) issues and challenges they are dealing with?

Craig Johnson argued states have generally done a very good job in being thoughtful and deliberate on implementing their e-commerce provisions.  Most delayed implementation for several months following the Court’s decision recognizing it will take some time for businesses to prepare to comply and work through issues.  States are not pursuing retroactive collections even though many had legislation on the books prior to the Wayfair ruling.  He noted it’s important to recognize that tax administrators have to enforce the law on their books, and if it becomes evident that some businesses aren’t or can’t be ready to comply for whatever reason it’s incumbent on legislatures to do something different.  The biggest challenge facing states, he continued, is getting the compliance information to the right people – particularly those selling into the state from around the country.  Towards that end, SST is striving to be a “one stop shopping site” for this information.

Yet, Johnson continued, more work needs to be done.  A notable implementation issue concerns the lack of uniformity with the basis for the threshold among states – e.g.  gross sales vs. taxable sales vs. retail sales.  There may be additional definitional and interpretive matters within that determination.  Occasional sales add a wrinkle for which guidance is necessary.  Finally, substantial nexus threshold determinations – especially deviations from the Supreme Court “blessed” 200 transactions/$100k sales threshold and the related potential for triggering undue burden – will be a critical decision for states in the post Wayfair world.

Doug Lindholm responded that there are a lot of potential challenges given the complexity of remote state sales tax collection.  States may claim they now have complete collection authority but if they have incredibly complex systems, “they will be challenged.”  If policymakers in a state focus on simplifying their own sales tax system independently, they are missing an important point.  Instead, he argued, simplifying the entire subnational system of sales taxation through a uniform approach is the critical issue.  It’s the disparity in systems across states and localities that needs to be addressed to greenlight collection authority.  With respect to the question of what sales should be included to meet the threshold, Lindholm argued forcefully for the establishment of one rule – perhaps developed by SST or NCSL.  He noted it would be much simpler for taxpayers to track just one definition, and it doesn’t really matter what that definition is as long as it’s consistent everywhere.  An additional benefit: it would be much easier for a larger state to allow a scalable threshold dollar figure for determining when a taxpayer must collect in its jurisdiction.

As a “big fan” of SST he concluded there is now an important window of opportunity to push states toward uniformity to offset the potential for successful litigation regarding undue burden.  “State courts do not have an appreciation of the complexity of this issue,” he said.  In response to a question about where the first challenges might come from, Lindholm replied it will likely be the result from states acting parochially on these issues and failing to act in a coordinated manner instead of pursuing a true national simplification effort.

Role for Congress?

In dissenting, four justices believed Congress should solve the problem, and four bills that would address this issue have been introduced at the federal level.  Is there a further role for Congress and what’s the prognosis for these bills?  Harley Duncan described the bills saying they have all been around “forever” and reflect one of two approaches.  The first approach seeks to establish or codify some set of national standards which would need to be met to exercise collection authority over remote sellers.  The other approach seeks to turn back the clock, set a very high bar for collections, and generally make remote sales taxation much more difficult.  Duncan expressed considerable skepticism that anything will pass.  For years, even with the support and influence of major retailers, business organizations, and states, nothing was passed.  Now that these organizations have finally “won” in court, it’s difficult to envision them now asking Congress to act and constrain states.  Combined with the fact that it’s much easier to kill something in Congress than pass it, there appears to be no dynamic for passage of any legislation.  One thing that could change the situation, he added, is if states move in such diverse paths that stronger cumulative and undue burden cases can be made.  However, the message being conveyed to legislators is that states are handling this judiciously, thoughtfully, and carefully.

Lindholm agreed saying, “the political dynamic has completely flipped.”  Opponents of e-commerce taxation are now arguing for legislation to save small businesses.  But with brick and mortar retailers and states lined up against it, it’s very difficult to see congressional action getting real traction.  However, this still begs the question of how can we get one set of rules to truly simplify the system.  Lindholm said he would much rather see states come together voluntarily than force the issue through federal legislation because you never know what you would get from Congress and the interests at work behind it.  Craig Johnson agreed, saying SST is keeping a careful eye out for potential “rogue” states recognizing the danger they could pose to two decades of work.

The Marketplace Provider Twist

Minnesota was the first of 11 states to enact a marketplace provider law, which adds an interesting twist in which individual sellers would have the nexus but marketplace providers would collect the tax.  What are the practical challenges of implementing these laws?

William Lasher highlighted several challenges marketplace provider laws present that have special relevance for a platform like eBay that is exclusively a marketplace with no retailing activity:

  • Some products are not UPC code based (anything and everything gets sold) and therefore not mapped to some tax code which creates challenges in determining their taxability.
  • Occasional sellers are common on their platform, and while many states have exemptions for occasional sellers eBay (and other marketplace providers) have no way of knowing what a seller does off the platform.
  • “Proving the negative” – the need to establish proof that a seller is not registered because they fall under threshold limitations.
  • States defining marketplace provider roles differently.  Some states simply added marketplace providers to the definition of “retailer” which brings the issues of discounts, coupons, and bad debts into play.  Are these issues now the marketplace provider’s or the seller’s?  Who is responsible for tax remittance and who is responsible for adjustments to the tax after the fact?
  • Are providers responsible for all sellers on the platform or only some subset?

He reiterated state notice and reporting rules in some state marketplace laws are more concerning and impactful than the Wayfair fallout.  Under notice and reporting rules, platforms would be responsible for sending buyers a list of things bought.  The list would also be sent to the tax authority and buyers would have to sort it out.  “Not a great buying experience,” remarked Lasher.

With respect to liability of errors on audits, if platforms rely on sellers’ representations, then the marketplace provider can’t be responsible for any errors since it has never seen the item being sold.  Harley Duncan noted that many smaller sellers have expressed concern about platform tax remittance, questioning how available the documentation that platforms have remitted tax on their behalf would be if the state audits them.  The same concern applies to platforms if they rely on some subset of sellers to remit their own tax and are “next in line” for producing the required tax revenues.  Lindholm noted when there is some inherent uncertainty between what the seller is selling and what the tax person is supposed to be remitting -- a common occurrence on marketplace platforms – there is a tendency to over collect to limit the consequences of an error.  However, there is a plaintiffs’ bar looking for class action opportunities like this.  1% of incorrect transactions on $10 billion of sales will present an irresistible opportunity for them.

Craig Johnson commented that in the contracts SST has with Certified Service Providers (CSP), the CSP is liable to the state for taxes in all cases where they process a seller’s transactions.  However, he noted that in service contracts between the CSP and the seller, the CSP may push some of that liability back onto the seller, so a careful review of the contract is in order.  With respect to audits, SST has found the biggest issues occur in mapping in which a seller puts its sales into product categories and the state certifies those categories.  However, states don’t currently know what each seller has put into those categories.  SST is currently working with CSPs to fine tune this process.  Ultimately the goal is to eliminate needs for states to audit sellers that have CSPs.

Still More Questions

What about inbound (foreign origin) sales?  Harley Duncan said he knows of nothing in treaties, federal law or Wayfair that says that sales taxes would not apply.  The two issues that arise are whether any undue burden argument might exist for foreign sellers and – more significantly – enforcement.  Lindholm echoed the enforcement concerns, especially with regards to non-tangible products, and maintained the issue has yet to be addressed in an effective way.

Does Wayfair have longer term impacts for state income and property tax regimes?  Lindholm thought Wayfair will affect income tax compliance, because it removes the only Supreme Court reference to physical presence regarding nexus generally.  With many taxpayers still not filing in jurisdictions where they only have some sort of economic presence and the Supreme Court’s silence on an income tax nexus standard, Lindholm opined that states are bound to be more aggressive in this area.

Last but not least, what is the Streamlined Sales Tax initiative’s future?  Lindholm said thanks to the Court’s majority opinion, new life has been breathed into Streamlined and states which have been reluctant to join may now see a reason to join to avoid future litigation.  Duncan disagreed, believing Streamlined will continue to be what it is – highly limited in its ability to pull in more states because from all current appearances, you don’t need to be in Streamlined to have collection authority.  He argued there is still a valuable role for SST in registration systems, CSPs, audit systems and definitions, but that will not be enough to incent other states to sign up.  Johnson was optimistic about SST’s future, noting marketing and communication efforts to non-member states are in high gear.  However, any moves to join SST will have to be driven by the business community and remote sellers in non-member states.  Lasher argued the fact that SST is an 18-year project still only featuring 50% adoption answers the question.  He said it needs to be expanded and improved and the way to do that is through federal legislation driving action.

In the end, we note that – like Waiting for Godot – the outcome of the Wayfair case is challenging to interpret straightforwardly.  Has the landscape of e-commerce been settled?  Or not?  Based on the perspectives of our panelists, sales taxation of e-commerce may now be the law of the land but the uncertainties continue as we now wait to see what the repercussions might be.