New Challenges to eCommerce Sales & Use Tax Policy: The Tax Case of the Millennium

By Erika Malzberg May 29, 2018

Contributed post by Vertex.

by Michael Bernard – Chief Tax Officer – Transaction Tax

As oral arguments in South Dakota v. Wayfair concluded on April 17, 2018, it was clear that a U.S. Supreme Court reversal of its 1992 Quill Corp. v. North Dakota ruling was not necessarily a sure bet, as many had expected leading up to the case.

The arguments raised several crucial questions – especially regarding sales and use tax policy concerning e-commerce transactions. This will likely will pose ongoing challenges for state and local tax authorities, as well as e-commerce sellers and buyers, regardless of how the Supreme Court rules in what has been billed as the “tax case of the millennium.”

After meeting in conference to discuss Wayfair’s oral arguments, the Supreme Court Justices have already voted on a decision. The case is now in one of the Justice’s hands to draft an opinion, which should be finalized and released sometime in June.

As I noted in a recent post, the Supreme Court’s overturn of the Quill precedent would trigger major changes and uncertainties for online sellers of all sizes as they scramble to register and comply with state sales tax requirements. However, the oral arguments made clear that a number of uncertainties require clarification, including the following questions:

What is a reasonable threshold for economic nexus? South Dakota’s challenged law sets a threshold for economic nexus at $100,000 in annual sales or 200 annual transactions; online sellers exceeding either figure (in South Dakota) must collect and remit sales tax. However, the idea that a single transaction – essentially, a “one-sale rule” – could trigger economic nexus was raised in response to a Justice’s line of questioning. While South Dakota’s thresholds were generally seen as reasonable, a one-sale rule would likely impose overwhelming tax compliance burdens on many small online retailers.

How will retroactivity be handled? Although the South Dakota law does not call for the state to collect past (or retroactive) sales tax, not every state currently offers retroactivity protection. If Quill is overturned, some states could conceivably require online sellers to collect and remit sales tax on transactions that occurred within the past decade. The states could simply acknowledge that Quill has been the law for 26 years and decide that retroactivity would be fundamentally unfair.

• What, precisely, is the burden of sales tax collection and remittance? Justice Stephen Breyer chided both sides for not providing concrete estimates of the cost of compliance and more tangible descriptions of what processes and technology are needed to satisfy compliance in each state. A cloud-based solution is the best avenue for e-commerce retailers that currently have no reporting capabilities. Large and midsize companies which currently sell remotely into jurisdictions where they are not collecting and reporting will need to review their need for additional resources of tax reporting software, hardware and possibly tax professionals.

• Will states get more aggressive with sales and use tax reporting requirements? If the Court decides against overturning Quill, it is highly likely that states will continue to press the outer limits of the physical presence test, which has clearly been the pattern over the past years. While Congress can create new legislation to address online sales taxation at any time, it has failed to do so for decades, despite strident appeals from states and bricks-only retailers. Quill does not prevent states from requiring online sellers to report transactions to tax authorities so that they can collect use tax from consumers. (See Direct Marketing Association v. Brohl – US Supreme Court)

As I stated above, the precise nature of the differences and impacts in which April 17’s oral arguments will result will not be known until one day in June. Until then, online retailers should take a close look at their current compliance practices, as well as evaluate supporting technology and personnel needed to collect and remit sales tax.

Want to learn more about how to simplify tax calculations, reporting, and compliance – and elevate the role of tax to be more integral to the strategic success of your business? Vertex is a strategic gold sponsor of Subscribed 2018, at the Marriott Marquis in San Francisco June 5-6. Register now and be sure to stop by the Vertex booth to talk with their team.

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