What Does the Wayfair Ruling Mean for Your Organization? August 14, 2018 TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to training@bkd.com within 24 hours of webinar If all eligibility requirements are met, each participant will be emailed their CPE certificate within 15 business days of webinar 1
THOUGHTWARE Presenters Ken Taylor, CMI Senior Managing Consultant SALT Services 317.383.4275 ktaylor@bkd.com Rick Najjar Senior Consultant II SALT Services 816.221.6300 rnajjar@bkd.com Scott Siegel, CPA Managing Consultant SALT Services 317.383.3794 ssiegel@bkd.com Agenda Background What is nexus A brief history of nexus Supreme Court's standard under the Commerce Clause The Case Wayfair v. South Dakota outcome What is the new standard for sales & use tax nexus? Reactions States/Economic Nexus Thresholds Congress Organizations Future Considerations Impact on Functional Areas Q&A 2
What Is Nexus? Nexus is the ability for a state to impose a tax or a filing obligation which is derived from the Commerce Clause of the U.S. Constitution as well as the Due Process Clause Article 1, Section 8, Clause 3 of the U.S. Constitution Commerce Clause United States Congress shall have power to regulate Commerce with foreign Nations, & among the several States, & with the Indian Tribes What Is Nexus? Amendment XIV of the U.S. Constitution Due Process [N]or shall any State deprive any person of life, liberty, or property, without due process of law... The Due Process Clause requires minimum contacts with the state Minimum contacts are satisfied if the taxpayer purposefully avails itself to the states market 3
What Is Nexus? Both clauses must be satisfied for a state to impose tax or a filing obligation on the taxpayer Congress has the power to create nexus standards if it so chooses, but only under the Commerce Clause. Congress cannot define due process A Brief History of Nexus Miller Brothers Co. v. Maryland (1954) Remote seller fulfilling orders without in-state solicitation is not sufficient nexus under due process Scripto v. Carson (1960) Remote seller with in-state sales agent had sufficient nexus under Due Process & Commerce Clauses National Bellas Hess v. Dep t of Revenue (1967) Remote seller fulfilling orders & soliciting orders did not have sufficient nexus under Due Process & Commerce Clauses without a physical presence 4
A Brief History of Nexus Complete Auto v. Brady (1977) Substantial nexus mentioned as one of four factors for imposing any state tax but not defined. Gross receipts tax case Quill Corp. v. North Dakota (1992) Remote seller soliciting orders is not sufficient nexus under the Commerce Clause without physical presence. Due process is now satisfied without physical presence Wayfair v. South Dakota (2018) Remote seller can have sufficient nexus without a physical presence under the Commerce Clause. Due process is still separate from Commerce Clause. Complete auto controls The Supreme Court's Contemporary Standard Under the Commerce Clause Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) Tax on interstate commerce only valid under the Commerce Clause if o o o o Tax applied to an activity having a substantial nexus with the taxing state; Is fairly apportioned; Does not discriminate against interstate commerce; & Is fairly related to the services provided by the state Gross receipts tax case, but this standard applies to all state taxes Substantial nexus under the Commerce Clause is not defined in the case Due process is not directly analyzed in this case. Past cases like Scripto & Miller Bros. Co. still control due process analysis 5
The Wayfair Controversy South Dakota enacted the law requiring sellers without a physical presence in the state to collect South Dakota sales tax on sales into South Dakota if, in the previous or current calendar year, the seller s sales into South Dakota exceeded $100,000 or the seller had 200 or more separate transactions into the states South Dakota consequently brought suit against major online retailers Wayfair, Inc., Systemax, Inc., Overstock.com, Inc. & Newegg Inc. Surprisingly, the U.S. Supreme Court granted cert. Prior to the Wayfair decision, a number of other states have disregarded Quill & enacted, but not enforced, economic nexus statutes in recent years, such as Indiana & Wyoming The Outcome Physical Presence Is No Longer Applicable The U.S. Supreme Court held that states may force an out-of-state seller to collect & remit sales tax on purchases, even if the seller does not have a physical presence in the taxing state The majority opinion, written by Kennedy & joined by Thomas, Alito, Ginsburg & Gorsuch, determined that the physical presence rule of Quill was "unsound & incorrect" The "physical presence" aspect of the decision in Quill was flawed, particularly considering the four-pronged test for collection of interstate taxes defined previously in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), as well as the new landscape of e-commerce in 2017 compared to 1992 that makes the Quill decision no longer applicable The Court once again invited Congress to step in The Court vacated the South Dakota Supreme Court's judgment & remanded the case Although greatly impacted, the ruling has implications far beyond e-commerce & the online retail industry 6
What Is the New Standard for Sales & Use Tax Nexus? What the decision leaves open for debate is the level of activity sufficient to create substantial nexus under the Commerce Clause The Court suggested that certain criteria of South Dakota s economic nexus law were sufficient to meet the substantial nexus requirement under the Commerce Clause such as Threshold of $100K in sales or 200 transactions (total sales as opposed to taxable sales) limits on the retroactivity South Dakota s membership in the Streamlined Sales Tax Agreement What Is the New Standard for Sales & Use Tax Nexus? While these criteria serve as useful guide posts, many questions are left unanswered, e.g., is one or more of these criteria absolutely required? What safe harbor amounts are sufficient? More importantly, the Court expressly acknowledges the potential for additional Commerce Clause challenges to South Dakota s nexus standard in the absence of Quill The Court did not analyze due process. Due process nexus remains separate from the Commerce Clause nexus The case will return to the South Dakota State Supreme Court with the possibility for an August decision. It is possible other Commerce Clause challenges may arise & thus delay a final decision at the state level. The parties are discussing potential out-of-court settlement 7
Reactions State Since the Wayfair decision, 19 of the 23 Streamlined Sales Tax (SST) full-member states have issued an email, alert, press release or official guidance in response to Wayfair. Ten SST states have confirmed they will apply the collection responsibility prospectively No states have indicated they will enforce economic nexus statutes retroactively; however, Massachusetts has issued a statement stating that their existing economic nexus regulation continues to apply & was not impacted by Wayfair 20 of the 23 non-sst states have issued an email, alert, press release or official guidance in response to Wayfair Of the five states without a state sales tax, three of them (Montana, New Hampshire & Oregon) have issued statements expressing their frustration with Wayfair & the uncertainty created by forcing their local businesses to start collecting & remitting state & local sales tax in more than 10,000 jurisdictions Do states want taxpayers filing $0.00 returns even though all sales are exempt? Economic Nexus: Effective vs. Enforced State: Effective Date: Enforcement Date: AL 1/1/16 10/1/18 CT 12/1/18 12/1/18 GA 1/1/19 1/1/19 HI 7/1/18 7/1/18 IL 10/1/18 10/1/18 IN 7/1/17 10/1/18 IA 1/1/19 1/1/19 KY 7/1/18 10/1/18 State: Effective Date: LA 6/21/18 1/1/19 ME 10/1/17 7/1/18 Enforcement Date: MA 10/1/17 10/1/17 MN 6/21/18 10/1/18 MS 12/1/17 9/1/18 ND 6/21/18 10/1/18 OH 1/1/18? OK 4/10/18 7/1/18 State: Effective Date: PA 3/1/18? RI 8/17/17? SD 5/1/16? TN 1/1/17? UT 1/1/19 1/1/19 VT 7/1/18 7/1/18 Enforcement Date: WA 1/1/18 10/1/18 WI 10/1/18 10/1/18 WY 7/1/17? 8
Economic Nexus Thresholds Typically based on total sales per previous calendar year or previous 12-month period Some states have mirrored South Dakota s thresholds; however, there are some notable exceptions Alabama $250,000 total sales in previous calendar year Oklahoma & Pennsylvania $10,000 in sales in the previous 12-month period No safe harbor Maryland & South Carolina Reactions Congress Will Congress finally step in? On June 28, 2018, Senate Bill 3180 ( Stop Taxing Our Potential Act ) was introduced by three senators from states without a sales/use tax to overturn Wayfair ruling based on undue burden to small business Pending/outstanding sales tax federal legislation Marketplace Fairness Act (MFA) S. 976 (April 2017) Authorizes each Streamlined Sales Tax member state to require sellers not qualifying for small-seller exception to collect & remit Remote Transactions Parity Act (RTPA) H.R. 2193 (April 2017) Similar to MFA, as it authorizes Streamlined Sales tax member states to collect & remit; however, it applies only to businesses using an electronic marketplace for making sales to the public Online Sales Simplification Act of 2016 Different from MFA & RTPA, as the collection responsibility is based upon seller s home state rules 9
Reactions Congress House Judiciary Committee held a hearing on July 24, 2018, to examine Wayfair impact Grover Norquist, president & founder of Americans for Tax Reform, suggested Congress act on federal legislation Utah State Senator Curtis Bramble, on behalf of the National Conference of State Legislatures, opined that since the issue has been resolved, Congress should not act, nor does it need to pass laws to fix problems that don t exist Reactions Organizational SST applauded the Wayfair decision. In addition, they specifically recognized the efforts of South Dakota in removing undue burden, which the Court was originally concerned with in Quill On August 1, 2018, the National Conference of State Legislatures (NCSL) approved an updated version of its internet & electronic commerce directive to reflect the federal government s permanent ban on internet access taxes Directive opposes efforts to apply tax policy to the internet in a discriminatory or a multiple manner to ensure equal tax treatment of all forms of commerce 10
Reactions Organizational Pending discussion among Multistate Tax Commission (MTC), SST, NCSL & the Federation of Tax Administrators regarding implementation issues Postponed from original August 3 date Some organizations, including NetChoice, filed amicus briefs in support of Wayfair stating that South Dakota s law was unconstitutional & its only purpose was to provide litigation in hopes of overturning prior case law Future Considerations Will states apply sales/use tax nexus retroactively? Will due process come into play? Wayfair reiterated the principle from Quill that the Due Process Clause & the Commerce Clause fall into distinct constitutional limitations. Although closely related, the two clauses reflect different constitutional concerns. The Due Process Clause is about fairness & thus requires minimum contacts between a state & the person, property or transaction that a state seeks to tax. Due process may be a viable defense against nexus assertion 11
Future Considerations How will Wayfair impact other state taxes? Taxpayers should pay attention to potential implications on an income or other business activity tax Taxpayers with economic activity in a state, but not filing should review their filing positions What, if any, advantages are created for foreign remote sellers? Effect on Functional Areas Tax Accounting AR AP Legal IT Treasury Purchasing Internal Audit Use Tax Accrual Process X? X???? Monitoring/Tracking Sales? X? Sales Tax Collection Process X? X X?? Exemption Certificates Customers? X?? Exemption Certificates Purchasing? X?? New GL Sales Tax Accounts; AAI Coding? X?? Remittance & Collection of Sales Tax X? X???? DOR & SOS Registrations X X? Internal Controls/Processes X X X X X X X X X 24 12
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