Within a matter of days, the Supreme Court of the United States (SCOTUS) is set to render a decision on Wayfair vs. South Dakota – a landmark case that will impact the collection and reporting of sales tax on internet sales.
Eric Tresh, Partner with Eversheds Sutherland and Tim Howe, Partner with Smith & Howard provide background on the case and thoughts on how a ruling may affect businesses:
Q: Consensus seems to be that SCOTUS will rule in favor of South Dakota. Is this likely?
In oral arguments, the Justices seemed to be split. Many seem to be interested in the practical ramifications of the case, which are significant. Those questions surrounded the cut-off number for requiring sales tax collection – would it be $90,000, $200,000, $500,000? In addition, they asked about third-party sellers, such as Amazon, that could be required to collect sales tax for sales made by non-Amazon sellers on the Amazon web site.
The Court does not have to render a far-ranging decision. It could issue an opinion that that focuses solely on the specific issues within South Dakota or it could rule in favor of Wayfair and uphold Quill (the current nexus “standard” for sales tax). However, the general opinion of all interested parties is that if the Court rules in favor of Wayfair, it is essentially pushing the issue back to Congress and the States to figure out what needs to happen with regards to sales tax collection obligations.
Q: Aren’t we looking to the courts to create uniformity?
If the court holds in favor of South Dakota, “uniformity” is the hope, but may not be the ultimate result. States will have their own discretion as to how to set registration and collection thresholds. What everyone is looking for here is how nexus should be interpreted and applied to sellers that are exchanging goods or services for consideration in a jurisdiction. It really depends on how the opinion is rendered.
Q: With so many states having different (and emerging) rules on sales tax collection, why is this not a matter for Congress instead of the Courts?
In oral arguments, several questions centered around why Congress isn’t handling this issue. It has been apparent through attempts with the Main Street Fairness Act, Marketplace Fairness Act, and others that a truly bipartisan agreement on the treatment of internet and remote sales transactions cannot be achieved. States have effectively grown tired of waiting, and have drafted legislation, such as South Dakota, attempting to enforce collection responsibilities which many deem to be unconstitutional. Now, we’re at the stage with a number of court cases that brings us to Wayfair vs. South Dakota.
A few factors have come together to bring the SCOTUS to take this case. A number of members in Congress and other amicus curiae (Latin for “friends of the court”) submitted amicus briefs urging the Court to take the case. Justice Kennedy has previously issued a concurring opinion in Direct Marketing Ass’n v. Brohl (2015), in which he stated,” A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier.” Finally, Justice Gorsuch – the newest appointed Justice – was a law clerk for Justice Kennedy and has some vested interest in the case.
Q: From a legal perspective, what should online sellers be doing now?
From a legal perspective, many businesses that would have to invest heavily in systems to collect and report on sales tax are “rolling the dice” this summer and waiting out the decision. These middle-market companies will address the needed investment as details emerge and a decision is rendered which would impact their business.
For larger companies, they are often being advised that the “game is over”. Even if SCOTUS rules narrowly or punts the issue back to Congress, there will still be years of litigation over any number of statutes that the states will devise. This means that from an accounting standpoint, larger businesses are advised to begin ramping up their strategy for compliance. An analysis of software and personnel capabilities, reporting mechanisms and other ramifications on the accounting and reporting functions required to be compliant with the new legislation being enacted by states for collection responsibilities should be completed.
Regardless, professional and experienced legal and accounting advice is a critical piece of planning in advance of implementation.
Q: If the court rules in favor of South Dakota, will states be able to charge sales tax retroactively?
Probably not, and South Dakota has said it will not charge retroactively. However, there are a few states that have enacted retroactive sales tax laws. The Supreme Court is not likely to opine on retroactivity, but will leave that to the states. However, this brings into focus a host of other legal concerns regarding the ability and right for a jurisdiction to enforce such an action.
Q: Georgia recently enacted an online sales tax collection law. What happens here after the Court’s decision?
If Quill is upheld, the Georgia sales tax law status would potentially be challenged as a violation of the Commerce Clause and viewed as unconstitutional. However, many states are already gearing up for similar legislation depending on the outcome of this case.
Regardless of the decision from the Supreme Court, the impact will be felt by all states (and businesses) for many years to come. It is not possible for the high court to render a decision that defines every detail for sales tax collection, and much will be left to jurisdictions for definition, and it is possible that even more will be left to Congress to ultimately “iron out the wrinkles”.
As always, when uncertainty is the rule of the day, our approach is to help our clients be prepared for any outcome. Our sales and use tax team, led by Tim Howe, Partner, is well versed in sales tax laws across the United States and is on top of the case before SCOTUS now – and will be well into the future. If you would like us to sit down with your management team to review your strategy for compliance, please call Tim Howe at 404-874-6244 or complete the form below and he will contact you right away.