Wayfair v. South Dakota: 5 Years Later Update

INTRO: 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 U.S. Supreme Court ruling in the Wayfair v. South Dakota case from June 2018, commonly referred to as the Wayfair decision. It has been instrumental in the world of sales and use tax and has influenced other areas of the sales tax landscape.

HOST: This case involved a nationally known online retailer. South Dakota argued that, despite the retailer having no physical presence in the state—no employees, inventory, stores, trucks, or warehouses—the retailer was doing enough business in the state to establish economic nexus and therefore was subject to South Dakota's sales tax regime. The Supreme Court ruled in favor of South Dakota, and that decision set this ball rolling.

HOST: The gist of today's call is to talk about what we have learned in the five years since that ruling. Joining today's discussion, as we did five years ago, are our two leaders of our sales and local tax practice: Cathie Stantor from Washington, D.C., and Lauren Stinson from Atlanta/Alpharetta, Georgia. Also joining me is my partner in crime, Sarah McGregor from Greenville, South Carolina.

SARAH MCGREGOR: Life is good. We timed this just right—recording on the fifth anniversary of the Wayfair decision from June 21, 2018—so it feels timely to mark a birthday for this court case.

HOST: You would think it's a fun thing to celebrate.

SARAH MCGREGOR: That's right.

HOST: Cathie, you were boots on the ground at the Supreme Court on the day of the oral arguments for Wayfair and shared a video. Looking back, what are your impressions from that experience?

CATHIE STANTOR: That was a really interesting day, hearing all the arguments back and forth. You couldn't tell which direction the Court would go, but my overall impression was that the Supreme Court did not want to be involved in sales tax. They seemed to regret the Quill decision, and they were reversing Quill while also suggesting Congress should address the issue through legislation rather than court decisions. Other courts seemed to share that view.

CATHIE STANTOR: There has been some bipartisan interest in Congress to address the issue, but unfortunately there has been no movement.

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

LAUREN STINSON: This is the single biggest impact I've seen in my career and in the sales tax world. It changed the landscape of sales tax as we knew it. Over the last five years every state adopted economic nexus, often with very little guidance or support, leaving companies to figure things out on their own.

LAUREN STINSON: We've helped develop tools to monitor economic nexus, provided training, and implemented technology solutions to help companies navigate multi-state responsibilities. Keeping companies in compliance as states adopted new rules has been a huge challenge.

SARAH MCGREGOR: This was originally a case about online sellers of tangible goods, but states have stretched the decision to other industries. How has that played out?

LAUREN STINSON: While Wayfair involved home goods, the impact reached far beyond e-commerce. Technology companies and providers of services delivered over the internet—SaaS and other software companies—were hugely impacted and largely unprepared. We've needed to educate companies on whether their products or services are subject to sales tax in various states.

LAUREN STINSON: Manufacturers were impacted too, especially as businesses shifted to omni-channel models—selling B2B, B2C, direct-to-consumer, and on marketplaces. Changes in how products are sold have been significantly affected by economic nexus and the Wayfair ruling.

CATHIE STANTOR: Startups in the technology industry are often focused on building and selling technology, not on sales tax. Transaction thresholds can be unclear—what counts as a transaction varies by jurisdiction. Some states have been removing transaction thresholds, which helps, but many tech clients are surprised to discover tax liabilities when they go to sell.

SARAH MCGREGOR: Have all the states codified economic nexus?

LAUREN STINSON: They have. Missouri was the last holdout and adopted economic nexus in January of this year. We have seen some states remove thresholds; South Dakota, which started this trend, is removing its transaction threshold now.

LAUREN STINSON: Louisiana, which I previously thought of as slow-moving, has been proactive. They eliminated the transaction count and stopped counting wholesale sales toward nexus. That approach—being realistic about what counts—makes sense, especially since marketplace sales are generally collected by the marketplace. In my view, those sales should not count toward a seller's economic nexus if the marketplace is responsible for collection.

CATHIE STANTOR: Let me challenge that for a moment. What about local taxes? Litigation in Louisiana raises the question of whether state nexus creates nexus with all parishes. How are states handling local tax issues?

LAUREN STINSON: Local taxes are a hot mess—Louisiana, Alabama, Colorado, and others. We could do a whole podcast on local taxes. This is one of the most significant issues five years after Wayfair: states and localities pushing beyond the authority provided under Wayfair.

LAUREN STINSON: For example, Alaska has local taxes even though it does not impose a state sales tax. That adds complexity to the SALT landscape.

HOST: This is so complicated. What is the role of technology in providing solutions, Lauren?

LAUREN STINSON: It's become too complex to handle sales tax manually. There are over 13,000 jurisdictions across the United States, so companies need rate tables and technology that can map product taxability with product tax codes. Many tax technology solutions exist, and new contenders appear frequently.

LAUREN STINSON: Implementing technology is a vehicle for compliance, but it's not a silver bullet. Companies need to monitor the technology, ensure it's configured correctly, and keep hands on the wheel.

CATHIE STANTOR: At the Supreme Court level, states argued that technology would address compliance and that it would not be an undue burden on interstate commerce. Five years later, the reality is very different.

SARAH MCGREGOR: How are states approaching enforcement? Are they auditing and looking for noncompliant companies?

LAUREN STINSON: We deemed 2023 the year of the audit. We're seeing many audits and notices. When a company registers, states are scrutinizing effective dates and asking why registration is only happening now. Taxpayers are being forced to come forward.

SARAH MCGREGOR: Is that where a lot of client activity comes from—clients calling after receiving notices to determine their exposure?

LAUREN STINSON: Yes. We get calls about notices, but also from growing businesses realizing they now need to address sales tax.

CATHIE STANTOR: It's always better to address sales tax up front. After the fact, it's difficult to recover tax from customers; it becomes an out-of-pocket cost for the seller, even though sales tax is the consumer's cost. Noncompliance turns it into the seller's problem.

SARAH MCGREGOR: There's also new territory with digital goods and the metaverse. If you're selling digital goods in a virtual environment, where and who collects sales tax? That could be another podcast.

CATHIE STANTOR: That raises origin- and destination-based sales issues in new dimensions.

LAUREN STINSON: States are starting to impose taxes on digital assets; Washington has imposed a tax on NFTs, so there is movement in that space.

HOST: Pivoting to income and franchise tax: when Wayfair first came out, we predicted it might edge into income and franchise tax. Cathie, looking back five years, what do you see?

CATHIE STANTOR: Wayfair empowered states to take economic nexus further, into income and franchise taxes and even tourism and meal-and-delivery taxes. From an income tax perspective, when companies register to collect sales tax, states obtain the companies' names and can follow up on the income tax side for enforcement.

CATHIE STANTOR: The Multistate Tax Commission's interpretation of Public Law 86-272 has shifted. That federal law, enacted in the 1950s before the internet economy, was meant to limit state income tax for sellers engaged only in solicitation. The MTC has become more aggressive, suggesting internet activity with customers—beyond shopping cart activity—can create income tax nexus. That differs from historical reasoning.

CATHIE STANTOR: We need Congress to address the income tax side to protect small businesses. Income tax obligations can be much more difficult and costly than sales tax compliance. Small sellers forced to file in many states face significant costs without corresponding state revenue.

CATHIE STANTOR: International companies are now becoming aware of sales tax issues, but income tax questions remain complex—treaty protections and professional judgment complicate matters. Congressional action to set clear limits and thresholds would help.

HOST: Lauren, any concluding thoughts?

LAUREN STINSON: Wayfair, sales tax, and income tax are highly complex. We work in this area every day and see many nuances involving laws, technology, and states' positions. We encourage companies not to go it alone—seek guidance and professional support to position your company correctly.

CATHIE STANTOR: If Congress does not act, we will see more litigation and more aggressive state positions, including applying Wayfair-type rules to other taxes. As states' fiscal situations change, they will be motivated to press these limits further.

SARAH MCGREGOR: Companies need agility and flexibility in reporting for both sales and income tax, treating these functions as core parts of the business rather than add-ons. Upfront planning and investment in compliance will save headaches down the road.

CATHIE STANTOR: Proper compliance will save time and money when owners want to sell their businesses.

HOST: This stuff is complex, and it will catch up with you. The states will find you eventually, and a buyer's attorneys or accountants will find issues when you sell. Proactively address these matters and obtain professional help from Cherry Bekaert.

HOST: Thank you for listening to our conversation on the impact of the Wayfair decision five years later. We are not providing tax advice on this podcast. Please consult with your tax advisor—hopefully at Cherry Bekaert—about your specific tax issues or to discuss information from today's podcast, especially regarding complicated SALT issues.

HOST: Check out the firm's website at CBH.com for the latest guidance and materials on this and other tax and business topics. This concludes today's podcast. Please like, share, and subscribe. Thank you, Lauren and Cathie, and thank you to our listeners for spending your time with us.