U.S. states are quickly lining up behind this year’s Supreme Court decision granting them authority to impose sales tax on the retail transactions of out-of-state merchants.
The court issued its groundbreaking South Dakota v. Wayfair ruling on June 21, overturning a standard that had limited the collection of sales taxes related to online and catalog orders, putting brick-and-mortar retailers at a distinct disadvantage.
Thirty-four states will have enacted corresponding laws by the turn of the coming year; an additional 10 states will look at setting up appropriate legislation or policies later in 2019, including the four most populous: California, Florida, New York and Texas. “A large majority of states are recognizing that they have some work to do on this and are taking this more seriously than we had ever envisioned they would at this point,” said Herb Tyson, ICSC’s vice president of state and local government relations.
States see this change — which applies regardless whether a seller maintains an in-state physical presence or “substantial economic nexus” or not — as being long overdue, according to tax consultant Sylvia Dion, founder and managing partner of Westford, Mass.–based PrietoDion Consulting Partners. “The rapid pace at which states have adopted economic nexus since the Wayfair decision is evidence that they were ready to pounce on the opportunity to tax out-of-state sellers,” she said.
“Gov. Jim Justice of West Virginia says he changed his opposition to the state’s online sales-tax push after investigating the issue more thoroughly”
Because most states adopting the rules are following triggering thresholds similar to those of South Dakota, where online sales exceeding $100,000 or upwards of 200 transactions push sellers over the state sales-tax line, “there appears to be a consensus that as long as they meet requirements close to the state’s rule, they are meeting the substantial-nexus requirement,” Dion said.
Gov. Jim Justice of West Virginia says he changed his opposition to the state’s online sales-tax push after investigating the issue more thoroughly. “I had the opportunity to talk to several retail stakeholders and realized that by not collecting these taxes, we were creating an unfair disadvantage to main-street businesses,” Justice said in a prepared statement. The sales-tax collections in West Virginia commence on Jan. 1.
In Texas the state comptroller has asked lawmakers to support a measure allowing sellers to opt out of any of the state’s 1,500 local taxing jurisdictions for e-commerce sales and comply instead with a standard 1.75 percent local sales-tax rate added onto the state’s 6.25 percent. The proposal, subject to stakeholder review, will come up in the January legislative session. This compromise was designed as a less burdensome alternative for taxpayers while still being a means to address Wayfair, according to Kevin Lyons, a spokesman for the Texas comptroller’s office. The office is proposing an annual threshold of $500,000 in sales for online sellers.
“There are 45 states with a state sales tax in place, while Alaska, Delaware, Montana, New Hampshire and Oregon collect no sales tax”
Ohio and Wyoming have pending court cases that may be dismissed in light of the Wayfair decision, Tyson says. Meanwhile, numerous states are also hastening to impose tax laws and regulations on such marketplace facilitators as Amazon.com, eBay, Etsy and others with third-party sellers active on their sales platforms.
There are 45 states with a state sales tax in place, while Alaska, Delaware, Montana, New Hampshire and Oregon collect no sales tax. These latter states, perhaps unsurprisingly, have been reluctant to address any part of the Supreme Court decision, Tyson says. “New Hampshire, for example, has a strong antitax attitude, and they feel this is a new tax,” he said.
Several states had established their own sales-tax provisions before the Supreme Court decision, including Massachusetts, which last year set Internet thresholds in excess of $500,000 in sales and 100 transactions. And in what is being dubbed a “cookie nexus,” Massachusetts maintains that the Internet cookies and similar tech applications on the devices customers use for buying products from out-of-state merchants essentially equate to a physical presence within the state. A number of states went live with their new remote-sales-tax requirements on Oct. 1, notably Alabama, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Nevada, North Dakota, Washington and Wisconsin.
The Wayfair ruling reversed the 1992 Quill Corp. v. North Dakota decision that had restricted states from imposing sales tax on remote sellers. High Court dissenters on the Wayfair case held that any such tax-formula changes should be left up to Congress.
The importance of the Supreme Court decision cannot be overstated, according to Todd Schafer, a Detroit-area commercial tax lawyer with Dawda, Mann, Mulcahy & Sadler. By some estimates, the dollars lost to state sales-tax collections this year minus the Supreme Court changes would have exceeded $30 billion, he says. The Wayfair decision not only levels the playing field for storefront retailers on price, it also provides them with an opportunity to compete with e-tailers in such areas as customer service, says Schafer.
States may eventually push collectively for a national federal framework that would simplify the tax for states and other tax jurisdictions, though “not in a near time frame, but down the line,” observed Susan Haffield, a partner with PricewaterhouseCoopers, at a tax forum in Nashville, Tenn., in October. Since Wayfair, three federal proposals that were intended to reverse or curb the Supreme Court ruling were introduced but given no congressional consideration. The odds of coming up with a federal standard before the new Congress is in session are “only slightly better than winning Powerball,” according to Tyson. The courts, he notes, have been fairly clear about not making the recent rulings retroactive.
“Shopping center landlords say they expect compliance with the Supreme Court decision to result in healthier community-based retailers, improved foot traffic and improved sales”
An eventual federal solution would bring about some needed uniformity, says Dion. “While the $100,000 is a fairly significant revenue threshold, the ‘200 or more separate transactions’ stipulation could very well mean that even retailers with very small sales could be subject to registration, collection and remittance responsibilities,” she said. For a small seller with products selling for, say, $10 each, a mere $2,000 in sales would create economic nexus, Dion argues. And the revenue threshold in some states is as low as $10,000, while in others it is as high as $500,000 — with some of those including wholesale and other tax-exempt sales and services in the formula, she points out.
The catalyst for the decisive case came when South Dakota sued four online sellers it said had failed to comply with a state economic-presence law enacted in 2016. The state sought declaratory relief from e-commerce sellers Wayfair, Newegg, Overstock.com and Systemax. The South Dakota Supreme Court ruled in favor of the sellers, and the state appealed to the U.S. Supreme Court (excluding Systemax, which had in the meantime opted to comply).
Across the U.S., those owners of shopping centers and other retail properties that Schafer has spoken with say they expect compliance with the Supreme Court decision to result in healthier community-based retailers, improved foot traffic and improved sales. This, according to Schafer, “will in turn increase the value of those retail properties.”
By Steve McLinden
Contributor, Shopping Centers Today