South Dakota v. Wayfair

South Dakota v.

Wayfair THE DECISION AND ITS IMPACT ON STATES

“Quill’s physical presence rule intrudes on States’ reasonable choices in enacting their tax systems. And that it allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust.” » Justice Anthony Kennedy, South Dakota v. Wayfair

SOUTH DAKOTA v. WAYFAIR DECISION AND ITS IMPACT ON STATES On June 21, 2018, the United States Supreme Court ruled that state and local governments have the authority to collect sales taxes from remote sellers. In siding with South Dakota in South Dakota v. Wayfair, the court overruled the 1992 Quill v. North Dakota decision, which barred states from requiring out-ofstate-companies to collect sales taxes.

STATE & LOCAL GOVERNMENTS IN 2017 COULD HAVE GAINED BETWEEN

$8 BILLION & $13 BILLION IN REVENUE IF THEY HAD AUTHORITY

TO COLLECT SALES TAXES

FROM REMOTE BUSINESSES

The decision is an important step to level the playing field between brick-andmortar companies and online retailers, and to ensure equitable taxation. According to the U.S. Government Accountability Office, state and local governments could have gained between $8 billion and $13 billion in tax revenue in 2017 if they had the authority to collect sales taxes from remote businesses. States will now be working on the implementation and administration of new policies based on the Wayfair decision.

THE CASE In South Dakota v. Wayfair, South Dakota asked the Supreme Court to overrule National Bellas Hess Inc. v. Illinois and Quill Corp. v. North Dakota, in which the Supreme Court barred states from requiring companies to collect sales taxes if they did not have a local physical presence.

The initial Bellas Hess ruling came in 1967 when online sales were nonexistent and the Quill ruling in 1992 came when e-commerce was in its infancy. According to the United States Census Bureau, in 1998 online sales accounted for less than 1 percent of total retail sales in the United States, compared to more than 8 percent in 2016. E-commerce continues to grow at a rapid pace and shows no signs of slowing down.

In 2014, The Council of State Governments, in partnership with the State and Local Legal Center and members of the Big Seven organizations representing state government, filed an amicus brief critiquing Quill, which prompted Justice Anthony Kennedy to ask for a case to overturn the ruling. The court encouraged Congress to address the issue after its Quill ruling; however, Congress failed to act for 26 years.

In the interim, states have developed policies to level the sales tax playing field and have moved to require remote, or out-of-state, companies to collect and remit applicable taxes. South Dakota and 30 other states expanded their state tax collection authority to sellers with no physical presence in their state.

South Dakota’s law, S.B. 106, set the stage for the Supreme Court’s decision in South Dakota v. Wayfair.

34%

OF TOTAL STATE REVENUES ARE SALES TAXES & 45 STATES

LEVY TAXES ON THE SALE OF GOODS & CERTAIN SERVICES

IMPACT ON STATES The U.S. Government Accountability Office estimated that state and local governments lost up to $13 billion in 2017 because they lacked the authority to collect sales taxes on remote online sales. A previous calculation from the National Conference of State Legislatures based on a University of Tennessee study in 2015 put the figure much higher at $26 billion.

Quill created a major disadvantage for local businesses and states in which sales taxes account for a high percentage of their total revenue. Sales taxes account for 34 percent of total state revenues. Currently, 45 states levy taxes on the sale of goods and certain services and many localities rely on sales taxes to finance essential government services.

2017 POTENTIAL REVENUE GAINS FOR STATE & LOCAL GOVERNMENTS FROM EXPANDED TAX COLLECTION AUTHORITY ON REMOTE SALES RANGE IN MILLIONS OF DOLLARS ALABAMA ARIZONA ARKANSAS CALIFORNIA COLORADO CONNECTICUT FLORIDA GEORGIA HAWAII IDAHO ILLINOIS INDIANA IOWA KANSAS KENTUCKY LOUISIANA MAINE MARYLAND MASSACHUSETTS MICHIGAN MINNESOTA MISSISSIPPI MISSOURI NEBRASKA NEVADA NEW JERSEY NEW MEXICO NEW YORK NORTH CAROLINA NORTH DAKOTA OHIO OKLAHOMA PENNSYLVANIA RHODE ISLAND SOUTH CAROLINA SOUTH DAKOTA TENNESSEE TEXAS UTAH VERMONT VIRGINIA WASHINGTON WEST VIRGINIA WISCONSIN WYOMING

$156 – $238 $190 – $293 $123 – $169 $1,000 – $1,735 $168 – $262 $128 – $194 $486 – $758 $232 – $367 $36 – $51 $42 – $60 $383 – $626 $168 – $261 $104 – $146 $113 – $170 $93 – $140 $195 – $288 $28 – $41 $165 – $252 $169 – $279 $221 – $336 $132 – $206 $90 – $123 $180 – $275 $67 – $95 $87 – $134 $216 – $351 $60 – $88 $510 – $880 $223 – $358 $34 – $49 $288 – $456 $157 – $228 $219 – $373 $34 – $48 $132 – $193 $33 – $47 $237 – $363 $763 – $1,232 $73 – $113 $16 – $23 $188 – $298 $298 – $453 $53 – $74 $123 – $187 $22 – $31

Source: Government Accountability Office analysis of Forrester Research, Internet Retailer, U.S. Census Bureau, and company financial data. | GAO-18-114.

Note: Totals may not sum due to rounding. These estimates are the potential revenue state and local governments could gain in calendar year 2017 if granted the legal authority to require all remote sellers to collect taxes on all remote sales. Alaska, Delaware, Montana, New Hampshire, and Oregon do not have statewide sales taxes. Some local sales taxes exist in Alaska and Montana but GAO did not have sufficiently reliable data with which to estimate these local government revenue gains.

COMPARISON OF STATE/LOCAL RETAIL SALES TAXES, 2016 State Alabama Alaska Arizona Arkansas California (1) Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada (2) New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming

Tax Rate (%)

Average Local Tax Rate (a)

Combined Tax Rate

0.04 none 0.056 0.065 0.075 0.029 0.0635 none 0.06 0.04 0.04 0.06 0.0625 0.07 0.06 0.065 0.06 0.04 0.055 0.06 0.0625 0.06 0.06875 0.07 0.04225 none 0.055 0.0685 none 0.07 0.05125 0.04 0.0475 0.05 0.0575 0.045 none 0.06 0.07 0.06 0.04 0.07 0.0625 0.0595 0.06 0.053 0.065 0.06 0.05 0.04

0.0497 0.0178 0.0265 0.028 0.0098 0.0462 none none 0.0066 0.0301 0.0035 0.0003 0.0239 none 0.0079 0.021 none 0.05 none none none none 0.0039 0.0007 0.0364 none 0.0137 0.0113 none -0.0003 0.0238 0.0449 0.0215 0.0182 0.0139 0.0432 none 0.0034 none 0.0122 0.0184 0.0246 0.0192 0.0074 0.0017 0.0033 0.0239 0.002 0.0041 0.0142

0.0897 0.0178 0.0825 0.093 0.0848 0.0752 0.0635 none 0.0666 0.0701 0.0435 0.0603 0.0864 0.07 0.0679 0.086 0.06 0.09 0.055 0.06 0.0625 0.06 0.0727 0.0707 0.0786 none 0.0687 0.0798 none 0.0697 0.0751 0.0849 0.069 0.0682 0.0714 0.0882 none 0.0634 0.07 0.0722 0.0584 0.0946 0.0817 0.0669 0.0617 0.0563 0.0889 0.062 0.0541 0.0542

Source: Compiled by Federation of Tax Administrators from various sources.

(1) Tax rate may be adjusted annually according to a formula based on balances in the unappropriated general fund and the school foundation fund.

(2) Nevada sales tax rate scheduled to decrease to 6.5% on July 1, 2015. (a) City, county, and municipal rates vary. These rates are weighted by population to compute an average local tax rate. (b) Three states levy mandatory, statewide, local add-on sales taxes: California (1%), Utah (1.25%), Virginia (1%).

We include these in their state sales taxes. (c) The sales taxes in Hawaii, New Mexico, and South Dakota have broad bases that include many services. (d) Due to data limitations, this table does not include sales taxes in local resort areas in Montana. (e) Salem County is not subject to the statewide sales tax rate and collects a total rate of 3.5%. New Jersey’s average local rate is represented as a negative.

NEXT STEPS States have waited decades for the ability to collect taxes from remote sales.

The first step for many states will be to review their current tax laws to understand the implications of the court’s decision.

Currently, 31 states tax internet sellers without a physical presence through a variety of different approaches, from click-through nexus policies to requiring sales tax collection by any economic actor in the state. While some laws, such as the legislation passed in South Dakota, are a good basis to build upon, laws in other states will need to be reviewed to ensure they don’t violate the U.S. Constitution’s Commerce Clause.

SOUTH DAKOTA v. WAYFAIR, INC. Opinion of the Court

“... South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs.”

Justice Anthony Kennedy

photo © gnagel/istock.com

States have the option of joining the Streamlined Sales and Use Tax Agreement, or SSUTA, which simplifies the process to collect remote sales tax. Currently, 23 states have joined the agreement, which could serve as the framework for states to administer and collect remote sales tax revenue. The agreement brings together state governments and the private sector to simplify the collection administration for all types of commerce.

SSUTA STATE STATUS JANUARY 1, 2017

Full Member States Associate Member States—Flex to Full Advisory States—Not Conforming Non-Sales Tax States Project States—Not Advisory Non-Participating State Source: www.streamlinedsalestax.org/uploads/images/maps/Map%20of%20States%201-1-17.pdf.

Additionally, any laws passed by Congress could set a federal standard regarding the administration of remote online sales taxes. Two options that Congress is considering are the Remote Transactions Parity Act, or RTPA, and the Marketplace Fairness Act, or MFA. Both acts give collection authority to states that have adopted the Streamlined Sales and Use Tax Agreement and base tax rates on the location of the customer, among other provisions to create uniform practices and protections. However, both RTPA and MFA were written with the assumption of Quill’s physical presence standard. Now that the court has overruled that, the legislation will need to be revisited.