States Could Use Wayfair Laws To Fix Depleted Budgets

By Jennifer Karpchuk
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Law360 (July 15, 2020, 1:42 PM EDT) --
Jennifer Karpchuk
Jennifer Karpchuk
Just over two years ago, the U.S. Supreme Court issued its landmark state tax decision in South Dakota v. Wayfair Inc.[1] As states grapple with revenue shortfalls resulting from the COVID-19 health crisis, will Wayfair continue to play a key role in filling budget gaps?
 
The court's decision in Wayfair struck down the requirement that a taxpayer have a "physical presence" in a taxing state in order to be subject to sales tax collection requirements; instead, the court found that mere economic presence is sufficient.

Post-Wayfair, economic nexus laws rule the land, with the majority of states imposing some form of economic nexus for purposes of their respective sales tax. Yet, many Wayfair laws are still in their infancy — with most going into effect during late 2018 or 2019.

With an economy that has become even more reliant on e-commerce over the past few months, a physical presence standard would have greatly limited states' sales tax collections during the COVID-19 shutdowns and closures of many brick-and-mortar businesses.

However, in a post-Wayfair world, with many shoppers turning to internet sellers such as Amazon.com Inc. for a range of products, the revenue shortfalls are not as stark as they would have been pre-Wayfair and prior to the enactment of many states' remote seller and marketplace facilitator laws.

While Wayfair and states' reactions and changes to their laws shortly after the decision certainly aided in increasing sales tax revenue in an ever-growing e-commerce world, there are other impacts Wayfair may still have in the coming months in light of the fiscal impact of COVID-19.

For the few states that haven't hopped on the Wayfair bandwagon, the COVID-19 revenue shortfalls may provide the final push needed. While the vast majority of states have adopted remote seller and marketplace facilitator laws over the past two years, a few states have yet to adopt them.

Florida and Missouri are the only remaining states with a sales tax that have not yet imposed a collection obligation on remote sellers.

Further, a handful of states have economic nexus laws, but have not yet imposed marketplace facilitator laws. On June 30, Mississippi adopted a marketplace facilitator bill, leaving Kansas as the only state with a remote sales tax law that has not yet implemented a marketplace facilitator law.[2]

The need for revenue due to the health crisis may be the final push needed in these states to get their legislatures fully on board with making a change to their respective sales tax laws.

Another consequence of the fiscal impact of COVID-19 on state and local taxes may be that states will seek to impose collection obligations on more taxpayers. The majority of states enacted remote seller and marketplace facilitator laws that maintained annual sales thresholds of $100,000 or 200 separate transactions within the state — consistent with the South Dakota law at issue in Wayfair.

A number of states have since dropped the transaction threshold in favor of a purely monetary threshold. A revenue gap filler that may be appealing to states would be to lower the monetary thresholds to capture more remote sellers. However, for states that adopted the South Dakota model, there are a number of reasons that such a change would be ill-advised.

Depending on the threshold, there could be legal challenges to the enactment of a threshold that is lower than the threshold approved in Wayfair, based upon the facts of that case. Further, many states' marketplace facilitator laws already encompass a number of smaller remote sellers that alone do not meet the $100,000 threshold.

Finally, as a practical matter, the additional revenue associated with lowering the threshold would likely be minimal, coupled with high administrative and compliance costs, thus making the practicality of the implementation of a lower threshold questionable.

However, there are states that implemented higher monetary thresholds than the South Dakota model — for instance California and New York both maintain a $500,000 threshold. On June 30, Tennessee enacted a law lowering its economic nexus threshold for purposes of its sales tax from $500,000 to $100,000.[3]

States with higher thresholds may start to follow Tennessee's lead and consider the adoption of lower thresholds, aligning themselves closer with the South Dakota model.

Another potential shift in Wayfair laws that may be spurred by COVID-19, is a shift toward economic nexus for purposes of states' income and gross receipts taxes. Prior to Wayfair, some states had factor-based nexus or economic nexus laws on their books during a time where there was debate over whether the physical presence standard applied equally to sales taxes as to income and gross receipts taxes.

With that debate eliminated by virtue of the abolishment of the physical presence test, soon after the Wayfair decision, a few states and localities adopted economic nexus provisions for purposes of their income or gross receipts taxes — such as Washington for its business and occupation tax and Philadelphia for its business income and receipts tax.

With an increased need for revenue due to COVID-19, more states may move to adopting economic nexus provisions for purposes of their income and gross receipts taxes. For income tax purposes, Public Law 86-272 would still offer some protections for certain taxpayers, but such protections would likely not extend to gross receipts taxes.

Along the same vein of expanding states' Wayfair laws to reach more taxpayers, states may start to consider imposing sales tax on more services, particularly digital services. While in most states tangible personal property is subject to sales tax unless specifically exempt, conversely most services are excluded from the tax unless specifically enumerated.

Increasing the types of services subject to tax while applying economic nexus principles to an increased pool of taxpayers would be another opportunity for states to increase revenue and may become an attractive avenue to pursue as more services are increasingly performed remotely over a virtual platform.

Finally, those with a background in state and local tax are keenly aware of the Wayfair decision and may find it hard to fathom a taxpayer being unaware of the case. Yet, two years after the Supreme Court's ruling, a number of taxpayers either are still unaware of the decision or have misgivings about what the decision and the corresponding changes to the law mean for their business and collection obligations.

As states look for ways to increase revenue, they may turn to taxpayers that have failed to comply with states' new remote seller and marketplace facilitator laws. Many states already have lists of taxpayers they believe should be collecting within their state. In the wake of Wayfair, others even sent letters to taxpayers informing them of their potential obligation.

The states may begin to use these resources to target companies that they believe have not complied with their remote seller or marketplace facilitator laws in an attempt to raise revenue. This may include pursuing collections actions or auditing remote sellers and marketplace facilitators.

Remote sellers and marketplace facilitators who have thus far stuck their head in the sand and hoped to avoid state revenue agencies should proceed with caution and should highly consider coming forward sooner rather than later to become compliant.  

Even two years after the decision, Wayfair is still leaving its mark in the state and local tax world. Coupled with the fiscal impact brought by COVID-19, taxpayers can expect its legacy to endure for the foreseeable future as it will likely continue to impact states' attempts at increasing revenue.



Jennifer W. Karpchuk is a shareholder and the co-chair of the state and local tax controversy and planning practice at Chamberlain Hrdlicka White Williams & Aughtry.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc. or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] South Dakota v. Wayfair, Inc. , 138 S. Ct. 2080 (2018).

[2] H.B. 379, 06/30/2020.

[3] S.B. 2932, 06/30/2020, effective 10/01/2020.

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