Wayfair v. South Dakota: 5 Years Later Update

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.

HOST: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. For this session, we are focusing on the impact of the significant U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. from June 2018.

HOST: We commonly refer to this as the Wayfair decision. It has been instrumental in the world of sales and use tax and has reached into other parts of the tax world.

HOST: As a quick recap, this case involved a well-known national online retailer. South Dakota brought a case against them, arguing that even without a physical presence—meaning no employees, inventory, stores, or warehouses—the company was doing enough business in the state to have economic nexus.

HOST: Therefore, they were subject to South Dakota's sales tax regime. The Supreme Court ruled in favor of South Dakota, which started this ball rolling.

HOST: The gist of today's call is to talk about what we have learned in the five years since that significant ruling.

HOST: Joining our discussion today are the two leaders of our State and Local Tax (SALT) practice: Kathy Stanton from Washington, D.C., and Lauren Stinson from Atlanta, Georgia. Hello, Kathy.

KATHY STANTON: Hello there, Brooks.

HOST: And Lauren Stinson, how are you doing today?

LAUREN STINSON: Hi Rex, I’m good.

HOST: As always, joining me is my partner in crime, Sarah McGregor, from Greenville, South Carolina. Sarah, how is life treating you today?

SARAH MCGREGOR: Life is good. We are recording this on the fifth anniversary of the Wayfair decision from June 21, 2018. I think it is timely to celebrate a birthday for this court case.

HOST: You would think it is a fun thing to celebrate. Let’s jump in.

HOST: Kathy, you had a very fun video outside the Supreme Court on the day of the oral arguments for Wayfair. You were boots on the ground, literally. What are your impressions from that experience looking back?

KATHY STANTON: That was a fun day hearing all the arguments back and forth. You really couldn't tell which direction the court would go, but my overall impression was that the Supreme Court didn't want anything to do with sales tax.

KATHY STANTON: They seemed to regret their earlier ruling in Quill. They were reversing Quill and stepping out of it.

KATHY STANTON: I think they were perturbed that Congress has not dealt with the issue. Not just the U.S. Supreme Court, but other courts seem to feel that this should be dealt with through legislation rather than court proceedings.

KATHY STANTON: In Congress, there has been some bipartisan interest to address it, but unfortunately, there has been no movement.

HOST: Lauren, Wayfair was at least on the surface all about sales tax, which is your primary area of practice. What changes have you seen in sales tax over the last five years since this ruling?

LAUREN STINSON: This is the single biggest impact I have seen in my career and in the sales tax world. It really changed the landscape of sales tax as we know it.

LAUREN STINSON: It has been a whirlwind. With every state adopting economic nexus, there was very little guidance or support from the states. Companies were left trying to figure it out.

LAUREN STINSON: We have helped develop tools to monitor economic nexus, provided training, and implemented technology solutions to help companies navigate these multi-state responsibilities. Keeping them in compliance has been a huge challenge for everyone.

SARAH MCGREGOR: Lauren, this was originally a case about online sellers of tangible goods. However, the results of this decision have allowed states to stretch it to other industries, right?

LAUREN STINSON: Yes. It was centered on Wayfair and the selling of home goods, but as states dug deeper and looked at the impact, many more industries were affected beyond e-commerce.

LAUREN STINSON: Technology companies and those selling services over the internet, certainly SaaS and software companies, were hugely impacted and never saw it coming.

LAUREN STINSON: We have had to do a lot of education around sales tax and the products companies are selling to determine if they must collect tax in different states.

LAUREN STINSON: Manufacturers were also impacted. Many were selling wholesale, but as businesses have moved toward omni-channel selling—B2B, B2C, and direct to consumer—the world has changed regarding how products are sold. All of that has been significantly impacted by economic nexus and the Wayfair rulings.

KATHY STANTON: Especially in the technology industry, you have startups with great technology trying to control costs and build their company to sell eventually. They are not sales tax people.

KATHY STANTON: They could have 200 transactions, but what constitutes a "transaction" is still unclear in some jurisdictions. Is it a line on an invoice or the invoice itself? You can trip that threshold easily.

KATHY STANTON: Thankfully, states have been removing some of the transaction thresholds, which is a good movement in this space. However, we find many technology clients are completely surprised by tax liabilities when they go to sell their company. We are trying to educate everyone on that impact.

HOST: Have all the states codified this economic nexus?

LAUREN STINSON: They have. Missouri was the last holdout and adopted economic nexus in January of this year. We have seen some changes along the way.

LAUREN STINSON: South Dakota, who actually started all this, is removing their transaction count threshold now. They are moving to a revenue-based threshold rather than a number of transactions.

HOST: So it will be a revenue threshold, not a number of transactions as well?

LAUREN STINSON: Exactly. Louisiana is also on the forefront. They have made a change where they have not only eliminated the transaction count but have also narrowed what they are counting.

LAUREN STINSON: They are no longer counting wholesale sales. In my opinion, this is the trend we should be seeing where states are being realistic about what they count.

LAUREN STINSON: They should not be counting wholesale sales since those are non-taxable sales in the first place. They should not necessarily be counted toward the economic nexus threshold.

LAUREN STINSON: The same applies to marketplace sales. The marketplaces are responsible for collecting sales tax, so those should not be counted toward a company's economic nexus because they are not taxable sales for the vendor.

SARAH MCGREGOR: Let me challenge that opinion for a minute, Lauren. What about local taxes? I know there is some litigation in Louisiana regarding whether nexus with the state truly means you have nexus with all the different parishes.

LAUREN STINSON: We are not going to get into local taxes today because that is a "hot mess" between Louisiana, Alabama, and Colorado. We could do a whole podcast on local taxes.

KATHY STANTON: It is a good point, though. One of the most significant issues five years out from the Wayfair decision is local taxes. States and localities are pushing this beyond the authority provided under Wayfair.

SARAH MCGREGOR: Alaska imposes local taxes, but the state does not even impose a state sales tax. We could do an entire podcast on SALT.

HOST: I am taking away that, much like the Supreme Court, I may not want to be near sales tax. This sounds complicated and every state has different rules. What is the role of technology in providing a solution?

LAUREN STINSON: It is so complicated at this point that most companies cannot manually manage sales tax anymore. You must get the rates for over 13,000 jurisdictions across the United States.

LAUREN STINSON: You need a rate table and a system with product tax codes to know what products to tax in which states. There are many technology solutions and new contenders popping up to challenge the mainstay tax technology companies.

LAUREN STINSON: However, our clients need to realize that implementing technology is not a silver bullet. It is just the vehicle for making it happen. You still need to watch the technology, ensure it is set up correctly, and keep your hands on the wheel.

KATHY STANTON: That’s a good point on the technology because that is exactly what I heard at the Supreme Court. The states were saying technology addresses the issue and that it wouldn't be an undue burden on interstate commerce. Five years later, that couldn't be further from the truth.

HOST: Lauren, how are the states approaching enforcement? I am guessing they are now auditing and looking for companies that are not in compliance.

LAUREN STINSON: We have deemed 2023 to be the "Year of the Audit." We are seeing many audits and notices.

LAUREN STINSON: Anytime a company registers, the states look very closely at the effective date. They want to know why you are just now registering.

HOST: Is that where you are getting a lot of client activity today—people calling because they have received notices and are just getting their arms around their exposure?

LAUREN STINSON: Certainly notices, but also as businesses grow, they realize they haven't dealt with sales tax. It is always better to address it on the front end.

LAUREN STINSON: It is very difficult to go back, not only from a customer relationship standpoint but because of the administrative difficulty of getting that sales tax back from the customer.

LAUREN STINSON: It becomes an out-of-pocket cost. Sales tax is intended to be the consumer's cost, yet it becomes the business's cost if you are not abiding by the rules.

HOST: I can see a whole new frontier. Several months ago, the metaverse was all the talk. If you are selling digital goods inside the metaverse, where are you and who collects sales tax?

SARAH MCGREGOR: That presents a whole other set of issues and a new dimension to origin and destination-based sales.

LAUREN STINSON: There are states that are starting to impose taxes there. Washington has imposed tax on NFTs, so there is movement in that space.

HOST: Let's pivot to income and franchise tax. When this first came out, we predicted it would edge into the income and franchise tax world. Kathy, what does it look like looking back five years?

KATHY STANTON: Even before Wayfair, the states had authority to impose economic nexus. This has empowered them to take that a step further.

KATHY STANTON: They are expanding toward tourism taxes, meal taxes, and delivery taxes. From an income tax perspective, once a company registers for sales tax, the state has the company's name and knows they are present in the state. Enforcement becomes much easier.

KATHY STANTON: There have been significant changes in the Multistate Tax Commission’s definition or interpretation of Public Law 86-272. That federal law was put in place in the 1950s, well before the internet-based economy, to protect sellers from having to pay income tax.

KATHY STANTON: That was supposed to be a temporary law, but it is 2023 and it still holds. We really need Congress to address the income tax side.

KATHY STANTON: The Multistate Tax Commission (MTC) is being much more aggressive with Public Law 86-272. They are saying any internet activity occurring with your customer—if it is not a shopping cart activity—creates income tax nexus.

KATHY STANTON: That is completely different than the line of reasoning used historically. We need Congress to step in and protect small businesses.

KATHY STANTON: Sales tax obligations are hard enough, but income tax obligations can be much more difficult to comply with. If a small seller has very little income and must file in over 40 states, that is a significant cost.

KATHY STANTON: We are also seeing this in the international community. International companies are becoming aware that they have to collect sales tax, but income tax still involves professional judgment, treaty protections, and other issues. It would be best if Congress stepped in to set limitations and thresholds.

HOST: I think that is a wrap on today's discussion. Let's move to our closing comments. Lauren, do you want to give your concluding thoughts?

LAUREN STINSON: You can quickly see how complicated this is. We do this every day, yet there are so many nuances to consider regarding laws, technology, and the states' positions.

LAUREN STINSON: We don't want our clients to go it alone because that can be a minefield. Get professional support to ensure your company is in the right position to move forward correctly.

KATHY STANTON: If Congress refuses to act, we are just going to see more litigation. States will be more aggressive in imposing Wayfair-type rules on other taxes.

KATHY STANTON: The states were flushed with cash during the pandemic. As that changes, it will motivate them to really press the limits on this.

SARAH MCGREGOR: From my perspective, companies need to develop agility and flexibility in their reporting functions for both sales tax and income tax.

SARAH MCGREGOR: They should look at it as a core part of their business instead of an afterthought. That sort of planning and investment in compliance upfront will save a lot of headaches on the back end and let them focus on their core business.

HOST: My concluding comment is that this will catch up with you one way or another. The states will find you eventually.

HOST: If you go to sell your business, the buyer's attorneys or accountants are going to find you. Proactively dealing with this and getting excellent professional help from Cherry Bekaert is the best approach.

HOST: Thank you for listening to our conversation on the impact of the Wayfair decision five years later.

HOST: A quick disclaimer that we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, regarding your specific issues.

HOST: Check out the firm's website at cb.com for the latest guidance and materials on this and other tax topics. This concludes today's podcast. Please like, share, and subscribe. Thank you, Lauren, Kathy, and our listeners. Let’s call it a day and go forth in peace.