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One Year Later, Wayfair Decision Reverberates Through State Tax Codes

It's been just 18 months since the U.S. Supreme Court ruled in Wayfair vs. South Dakota that states can hold out-of-state vendors liable for sales tax, but since then virtually every state in the country has adopted laws enabling them to do so, an extremely rapid change that has made economic activity versus physical presence the main factor in determining tax nexus, according to two speakers at the Foundation for Accounting Education's New York and Tri-State Taxation Conference. 

One of the speakers, Joe Huddleston, the executive director of Ernst & Young's National Indirect Tax Group, said it was surprising to see how quickly state governments moved after the Wayfair decision to enact statutes similar to those upheld in South Dakota. 

"It's rare to see states act very quickly to reach uniform positions," he said. "The states reacted incredibly quickly after Wayfair to begin enacting what essentially were South Dakota-type statutes. Only a handful of states already had them in place, envisioning the overturning of Quill [the previous Supreme Court case that upheld the physical presence standard]."

With all these new laws, though, have come new questions and new conflicts. Huddleston noted, for example, that with state sales tax nexus comes the need to register in that state. But this has proven difficult for international sellers, as the requirements often ask for items that the merchants simply do not have, like Social Security numbers or Employer Identification Numbers. 

A broader issue is the lack of uniformity among these various state laws. While many base establishment of nexus on a combination of dollar amounts and number of transactions, much like South Dakota, the specifics of how many dollars and how many transactions vary from jurisdiction to jurisdiction. What's more, noted the other speaker, Steve Eller, a PKF O'Connor Davies tax partner, the time frames for when sales are counted toward these thresholds can have wide variation as well. 

"Certain states you current calendar, some states you have to go back to the prior calendar year. So not withstanding the thresholds, states have various ways to measure when these thresholds have been met: prior year, prior quarters, whatever, but you can see there's a diverse way of measuring the thresholds," he said. 

Even though their statutes are new, Eller said that many states are already adjusting them: He noted that many are lowering or raising their dollar thresholds from the original legislation. Some, he said, are even abandoning transaction thresholds, finding it to be not to be worth "dragging them into a registration and filing" based on $200 in sales. 

One of the more worrying issues to Huddleston, however, has to do with the category of entities called marketplace facilitators. While the specific name they're called may vary from state to state, in general they're platforms such as Amazon or Ebay that enable others to sell through them. Many states have placed the responsibility to collect and remit sales taxes on these facilitators, given their large presence and wide use. But Huddleston said that there are questions about what counts as a marketplace facilitator. Many of the statutes, he said, are very broad, defining them as those that transmit or otherwise communicate offers or acceptance between buyer and seller; owning or operating the infrastructure that brings buyers and sellers together; providing a virtual currency that buyers are allowed or required to use to purchase products from the seller; or software development or R&D activities related to any of the other activities. With this in mind, the question is not what is a marketplace facilitator, but what isn't? 

"For instance is Visa a marketplace facilitator? Mastercard? American Express? Discover? Are your banks? They're certainly doing any number of those things. I don't know the answer. I don't think the states had that in mind when they began passing these statutes, but clearly they can be swept into these issues," he said. 

This question then raises other questions. For example, if a telecom that qualifies as a marketplace facilitator sells a phone on Amazon, definitely a marketplace facilitator, who exactly collects and remits the tax? Or, asked Eller, what if a seller has part of its sales completed through a marketplace facilitator but another part of its sales completed directly with the buyer. Do the states combine the income for the purpose of sales tax? Huddleston said some have a separate threshold for direct sellers versus those that use a marketplace facilitator, and that they would likely just combine the income, but he wasn't sure how they would differentiate it. 

"I'm still scratching my head thinking it's a big mess," said Huddleston. 

Eller also pointed to certain constitutional questions left in the wake of Wayfair. For example, he said that New Hampshire, unlike the other states, became very fearful that in-state vendors would get forced to register and collect and remit sales taxes to other states when they don't even pay sales taxes in that state. So New Hampshire passed what Eller called "anti-Wayfair legislation" that explicitly says outside jurisdictions cannot tax its residents. 

"Whether that's constitutional, I'm not sure," he said.