The Court has spoken after Wayfair, what now?

Transcription

1 The Court has spoken after Wayfair, what now? Thursday, June 28, :00 pm ET We will be starting soon Please disable pop-up blocking software before viewing this webcast

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4 Speakers Mark Arrigo National Managing Partner State and Local Tax Matthew Melinson Partner State and Local Tax Jamie Yesnowitz Principal -- State and Local Tax WNTO Leader Jeremy Jester Senior Manager State and Local Tax Grant Thornton LLP. All rights reserved. 4

5 Learning objectives 1 Interpret the Court s decision, including rationales 2 Assess how states will react to the decision with respect to their treatment of remote seller issues 3 Recognize what kind of response may be necessary to ensure compliance in a post-wayfair world Grant Thornton LLP. All rights reserved. 5

6 Agenda 1 Practical Considerations 2 Wayfair the Decision 3 Physical Presence Requirement Overruled 4 Other Thoughts/Implications 5 Anticipated State Reaction Grant Thornton LLP. All rights reserved. 6

7 Practical Considerations Grant Thornton LLP. All rights reserved. 7

8 Wayfair the Decision Grant Thornton LLP. All rights reserved. 8

9 Wayfair the Decision South Dakota v. Wayfair, Inc.(June 21, 2018) Ruling: U.S. Supreme Court held that the South Dakota statute satisfies the substantial nexus standard that is a component of determining whether a tax can survive Dormant Commerce Clause scrutiny Expressly overruled Quill because the physical presence rule is "unsound and incorrect" Vacated the South Dakota Supreme Court's decision and remanded the case to consider whether the South Dakota statute could be challenged on an alternative basis under the Commerce Clause Fundamental change in constitutional sales tax nexus standard that has been applied for over 50 years Grant Thornton LLP. All rights reserved. 9

10 Wayfair the Decision Split Decision (5-4) Justice Anthony Kennedy authored decision. Joined by Justices Thomas, Ginsburg, Alito and Gorsuch Justices Thomas and Gorsuch filed concurring opinions Chief Justice Roberts filed a dissenting opinion, in which Justices Breyer, Sotomayor and Kagan joined Grant Thornton LLP. All rights reserved. 10

11 Wayfair the Decision South Dakota Law Imposed tax collection obligations on certain remote sellers that sell tangible personal property, products transferred electronically, or services for delivery into South Dakota Remote sellers are subject to the provisions if they meet one of two thresholds in either the current or previous calendar year: Gross revenue for such sales exceeds $100,000; or Seller engages in 200 or more separate in-state transactions Grant Thornton LLP. All rights reserved. 11

12 Wayfair Physical Presence Requirement Overruled Grant Thornton LLP. All rights reserved. 12

13 Wayfair Physical Presence Overruled Commerce Clause Grants Congress the power to regulate Commerce among the several States Although phrased as a positive grant of power, the Court has "consistently held this language to contain a further, negative command, known as the [D]ormant Commerce Clause, prohibiting certain state taxation even when Congress has failed to legislate on the subject." Complete Auto Transit v. Brady (1977) Ruling: Established the four-pronged "Commerce Clause" test 1. Substantial nexus 2. Fair apportionment 3. Non-discrimination 4. Fair relationship to services and protections provided by the state Grant Thornton LLP. All rights reserved. 13

14 Wayfair Physical Presence Overruled National Bellas Hess v. Illinois (1967) Ruling: Supreme Court held that only businesses with in-state nexus must collect sales tax, because to allow otherwise is too burdensome Nexus is created through physical presence, such as a warehouse, office, retail location, employees, or vehicles Quill Corp. v. North Dakota (1992) Ruling: Supreme Court held that obligation to collect Use Tax does not violate Due Process Clause, but does violate Dormant Commerce Clause Stare decisis Court upheld "bright-line" test, even though it overruled its Due Process holding Grant Thornton LLP. All rights reserved. 14

15 Wayfair Physical Presence Overruled Criticism of Quill physical presence rule Physical presence rule is not a necessary interpretation of the substantial nexus requirement under Complete Auto Transit Quill causes rather than resolves market distortion Quill imposes the sort of "arbitrary, formalistic distinction that the Court's modern Commerce Clause precedents disavow." In Quill decision, Court acknowledged that physical presence requirement is "artificial at its edges." By imposing the physical presence rule, Quill has "come to serve as a judicially created tax shelter for businesses " Grant Thornton LLP. All rights reserved. 15

16 Wayfair Physical Presence Overruled Criticism of Quill physical presence rule (continued) Unclear why an employee or building constitutes substantial nexus but elements of modern technology that have physical characteristics do not establish nexus 42 states, two territories and the District of Columbia had requested that the Court reject the physical presence rule Physical presence rule is unfair to states that are attempting to fairly enforce their sales tax that provides a crucial source of revenue Grant Thornton LLP. All rights reserved. 16

17 Wayfair Physical Presence Overruled Stare decisis Although the Court is reluctant under this principle to overrule its prior decisions, the Court explained that it was warranted and necessary in this instance The Internet's dramatic growth has changed the dynamics of the national economy After conceding that Congress could change the physical presence rule, the Court explained that it should not ask Congress to rectify the Court's false interpretation of the Constitution Substantial virtual connections Grant Thornton LLP. All rights reserved. 17

18 Wayfair Physical Presence Overruled SD Law provides merchants with a reasonable level of protection Retailers only required to collect sales tax if they do a considerable amount of business in the state Law not retroactive SD is a member of the Streamlined Sales and Use Tax Agreement Grant Thornton LLP. All rights reserved. 18

19 Wayfair Other Thoughts/Implications Grant Thornton LLP. All rights reserved. 19

20 Wayfair Other Thoughts Substantial Nexus "Clearly sufficient based on both the economic and virtual contacts" Possible other Commerce Clause Violations Court vacated and remanded the decision "The question remains whether some other principle in the Court's Commerce Clause doctrine might invalidate the [statute]." Because the statute clearly violated the Quill physical presence rule, other potential Commerce Clause violations were not litigated or briefed in the SD Supreme Court decision Grant Thornton LLP. All rights reserved. 20

21 Wayfair Other Thoughts Dissenting Opinion Chief Justice John Roberts noted that he would decline the invitation to abandon the physical presence requirement Agreed with the majority opinion that Bellas Hess was wrongly decided, but noted that e-commerce has grown to be a significant part of the national economy under the existing Commerce Clause and physical presence rules "Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress" Grant Thornton LLP. All rights reserved. 21

22 Anticipated State Reaction Grant Thornton LLP. All rights reserved. 22

23 Anticipated State Reaction States likely to enact further sales tax nexus legislation Substantial nexus standard Different states have enacted different transaction thresholds SD's threshold validated. What about others? Statutory vs. regulatory adoption Potential implications for foreign entities with no federal U.S. tax obligations Local jurisdictions could follow suit, where able to adopt local taxes Notice and Reporting requirements likely become obsolete Grant Thornton LLP. All rights reserved. 23

24 Anticipated State Reaction Potential state income tax implications Nexus The application of Quill to income tax no longer appears possible States may be encouraged to enact income tax laws including a bright-line nexus standard Potential dormant Commerce Clause challenges Numerous states have already responded, with more to come in the next few weeks Grant Thornton LLP. All rights reserved. 24

25 Anticipated State Reaction Examples of State Action as of June 26, 2018 North Dakota Updated website (for registration purposes) and activation of 2017 economic nexus rules Minnesota Notice issued by Department regarding considerations being taken for enactment in state with notice to be given within 30 days of a decision New Jersey Proposed economic nexus rules ($100K/200+ transactions), same as SD standards, introduced June 21, 2018 Grant Thornton LLP. All rights reserved. 25

26 Anticipated State Reaction Other Potential Considerations Retroactivity Due Process vs. Commerce Clause arguments Impact on current litigation Marketplace provider laws Grant Thornton LLP. All rights reserved. 26

27 Practical Considerations Companies should consider taking the following action steps: Review activities, through company-wide perspective (e.g. sales, human resources, legal, and other departments), in jurisdictions where physical presence is lacking. Compare the activities to existing economic nexus rules Calculate the impact of the decision on financial statements, especially ASC 450 For income tax and ASC 740 purposes, prepare if/when states commence applying economic nexus principles Determine automation needs from both sales tax collection and sales tax payment to vendor perspectives given greater potential for vendors to overcharge sales tax Grant Thornton LLP. All rights reserved. 27

28 Practical Considerations Companies should consider taking the following action steps: Foreign companies lacking US physical presence now must consider collecting and filing requirements given lack of indirect tax treaties Consider additional registration and compliance obligations Plan for audit implications Actively track federal and state legislation Consider applying for voluntary disclosure and/or amnesty programs, as appropriate Grant Thornton LLP. All rights reserved. 28

29 Practical Considerations Thoughts: Timing of when SD statute will become operative Will Wayfair and other litigants pursue a further challenge of the statute on Commerce Clause grounds? Timing of when other state statutes will become operative Will Congress respond? Congress could enact legislation to provide a uniform nexus standard Grant Thornton LLP. All rights reserved. 29

30 Practical Considerations This is an opportunity to implement innovative changes to modernize your tax department: Take advantage of disruptive solutions providing pragmatic, customized, and scalable options: RPA :automate the increased repetitive and mundane compliance tasks to reduce costs, increase accuracy, and more time spent on valued activities Data Analytics: leverage your own data to make informed decisions, engage leadership, reduce risk, increase overall value of the tax department Blockchain: manage risk, avoid surprises and drive value in a cost effective manner through blockchain and cryptocurrency Grant Thornton LLP. All rights reserved. 30

31 Questions? Grant Thornton LLP. All rights reserved. 31

32 Speakers Mark Arrigo National Managing Partner State and Local Tax Matthew Melinson Partner State and Local Tax Jamie Yesnowitz Principal -- State and Local Tax WNTO Leader Jeremy Jester Senior Manager State and Local Tax Grant Thornton LLP. All rights reserved. 32

33 Disclaimer This Grant Thornton LLP presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this presentation. The views and interpretations expressed in the presentation are those of the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered For additional information on matters covered in this presentation, contact your Grant Thornton LLP adviser

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