The Supreme Court’s decision in South Dakota v. Wayfair created a monumental shift in the state tax landscape. Prior to the Court’s decision, forty-one states passed “kill Quill” laws in an effort to override the default physical presence rule. In its 5-4 decision, the Court abandoned the physical presence requirement established by Quill Corp v. North Dakota. As a result, out-of-state retailers may now have nexus with other states and thus be required to collect and remit sales taxes. In fact, states may not discriminate against interstate commerce, thereby requiring states to treat out-of-state sellers and in-state sellers the same.
It is unclear as to what exactly constitutes an undue burden on interstate commerce. However, it is important to note a few distinctive features of the law at issue in South Dakota v. Wayfair. Senate Bill 106 requires sellers to remit sales taxes to South Dakota whether or not they met the physical presence test. Nevertheless, the law features the following key elements: (1) the law is not retroactive; (2) there is an exception for small sellers (the law does not apply to sellers who deliver less than $100,000 of goods or services or engage in less than 200 separate transactions for the delivery of goods and services into South Dakota each year); and (3) South Dakota is a member of the Streamlined Sales and Use Tax Agreement—an agreement which provides “among other things, uniform definitions of certain products and services, simplified tax rates and immunity from audit liability for sellers that utilize sales tax administration software paid for by the state members.”
Implications for Texas
The Texas Comptroller is proceeding deliberately, but carefully, to assess the Wayfair decision and its implications for the state of Texas. Consequently, the Comptroller is currently soliciting the input of major stakeholders who may be affected by any potential state decisions, such as: legislators, Texas retailers, remote sellers and marketplace providers who are currently not collecting taxes, local taxing jurisdictions, the Taxpayer and Business Advisory Groups, and trade associations and other affected parties.
Currently, the Texas Comptroller is asking the legislature to focus on three main provisions to ensure Texas does not place an undue burden on remote sellers:
1. Amend the definition of “seller” and “retailer” in Tax Code § 151.008 (“Seller” or “Retailer”) to include marketplace platforms used by third-party sellers and provide adequate liability protection for the marketplaces that collect and remit for those sellers.
2. Amend Tax Code § 151.059 (Fee Imposed in Lieu of Local Sales and Use Taxes), which currently allows a nonresident (remote) seller to pay a fee based on a weighted average local sales and use tax rate in lieu of collecting local sales and use tax based on actual local tax rates. This statute currently only applies to a change in collection responsibilities based on the passage of federal legislation, not to changes in federal law based on a court case such as Wayfair.
3. Amend Tax Code § 151.107(c), which is a companion provision to § 151.059. This statute imposes a collection responsibility on sellers of only tangible personal property, and not taxable services, if federal legislation passes.
Further, the fiscal impact remains to be seen in Texas as a result of the Wayfair decision. Many have provided estimates on Texas’ potential losses in tax revenue related to remote sellers. However, many of these estimates fail to address various factors, some of which the Texas Comptroller recognizes:
1. In the past year, some remote sellers have volunteered to collect in anticipation of the Wayfair decision or for other reasons. For example, some taxes are now being collected due to the fall 2017 amnesty program sponsored by the Multistate Tax Commission nexus program for third-party sellers using Amazon’s online marketplace.
2. Growth in internet sales in recent years has been concentrated among the largest retailers, most of which already collect Texas sales and use taxes.
3. A portion of taxes on remote sales will never be collected because the sales will be under the economic nexus threshold for small sellers, which is yet to be determined in Texas.
4. There will always be some non-compliance by remote sellers, just like there is continued non-compliance by some in-state sellers.
Multiple businesses, especially small businesses, were affected by the Supreme Court’s monumental decision in Wayfair. No longer is physical presence the standard for creating nexus with the state of Texas—“substantial nexus” now rules the day. While the Texas Legislature reacts to the Court’s decision, businesses will need to navigate this unchartered territory. In the meantime, businesses and business owners should conscript the legislature to address obvious concerns.
For example, as the Texas Comptroller points out above, the “economic nexus threshold for small sellers” needs to be addressed. While a bright-line rule is generally appreciated in this area (less than $200,000 in annual sales), the legislature needs to provide guidance that is more amorphous. Smaller businesses do not want to be caught in a pendulum based on an arbitrary threshold, swinging above and below the line based on fluctuating annual revenue or transactions.
Additionally, reading the Wayfair decision as solely affecting sales and use taxes across the nation misses the mark. Sales and use taxes are only small pieces of the puzzle. The bigger pieces are corporate income taxes and gross receipts taxes. For Texas, it is the corporate franchise tax. Currently, the nexus standards are provided in the Texas Comptroller’s Form AP-114. It is very important to address how the Court’s decision will affect nexus related to the Texas franchise tax.
Again, it would behoove the Texas Legislature to consider the words of Chief Justice Roberts in his dissenting opinion in Wayfair:
States and local governments are already able to collect approximately 80 percent of the tax revenue that would be available if there were no physical-presence rule. . . . The Court, for example breezily disregards the costs that its cession will impose on retailers. Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers. . . . The burden will fall disproportionately on small businesses. . . . The Court’s decision today will surely have the effect of dampening opportunities for commerce in a broad range of new markets.
The Texas Legislature (and by extension the Texas Comptroller) will need to make proper adjustments based on the Supreme Court’s Wayfair decision. While there are competing interests of multiple interested parties, remote businesses will need to begin preparing for an increase in tax compliance. It will remain to be seen how much the Texas Legislature will do in terms of changes to the current nexus landscape. Hopefully, any changes will be on a prospective basis. In the event they are not, see my previous article: Your Sins Are Forgiven: The Texas Tax Amnesty Program and VDAs.