It has been five years since the U.S. Supreme Court heard South Dakota v. Wayfair. The court decided on June 21, 2018, that states could tax purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. Much of what has happened in state tax law since then has been based on that decision.
The results have been very positive for state revenue, but mixed in terms of the effects on business, according to Clark Calhoun, a state and local tax partner at law firm Alston & Bird.
“One of the stronger arguments for it is that it helped level the playing field between brick-and-mortar and online sellers,” he said. “There’s no longer an artificial distinction based on physical presence. Every company has the obligation to collect taxes, so from that standpoint, it’s a good thing. But after five years, there’s still a lack of awareness by so many businesses that have not complied with state tax obligations.”
The road to the current sales tax landscape started decades ago, according to Scott Peterson, vice president of U.S. tax policy and government relations at Avalara, and former executive director of the Streamlined Sales Tax Governing Board.
“It started with a coalition promoting one or more forms of the Main Street Fairness Act,” he said. “There were several stages that led to the Wayfair outcome. The challenge had always been that sales tax is complicated for businesses. The Streamlined Sales Tax Project has been working for 23 years to simplify sales tax, but businesses still spend a lot of time collecting sales tax. It’s ironic that, five years after the Wayfair decision, and many years after the advent of the internet, sales tax compliance is still hard for businesses. But sales tax is 100 years old, and we’ve only relatively recently started the conversation around modernizing sales tax.”
The Multistate Tax Commission and the National Council of State Legislators have been instrumental in providing guidance on the implementation of Wayfair, noted Mike Bernard, chief tax officer at Vertex. “The four functions that sellers must perform are to calculate, collect, remit and defend on audit,” he said. “The work of the MSC and the NCSL provides guidance for these functions.”
Bernard noted that the Wayfair opinion included a reference to South Dakota’s procedure including a carveout for remote sellers that might be burdened by compliance: “They thought that was important, and mentioned that there was software available for them — and by the way, it’s essentially free.”
While most states initially had a threshold amount and number of transactions that a company had to exceed to be subject to collecting sales tax, many states have eliminated the transaction test. “You can have low-dollar but high-volume transactions that don’t amount to a lot of tax collected,” explained Bernard.
He noted a Senate Finance Committee hearing in June 2022 that discussed many of the complexities and burdens facing small businesses in complying with the remote taxes imposed as a result of Wayfair.
The different standards and thresholds between states and localities can create a burdensome and complex system that makes compliance difficult for small businesses. Sellers now must either learn to comply with the rules of myriad tax jurisdictions where customers reside, or hire specialized advisors, remarked Sen. Mike Crapo, R-Idaho, ranking member of the committee, at the hearing.
Tax attorney Barbara Weltman, author of “Small Business Taxes 2023,” agreed.
“The sales tax responsibility for small businesses that sell remotely has become a nightmare,” she said. “Yes, there’s an exemption for very small businesses. But those near the threshold don’t know whether they’ll cross it, triggering sales tax registration, collection and remittance. Sales tax on remote sellers is just another burden on small businesses, and unless they can afford an outside service, there’s very little guidance on how to meet sales tax responsibilities in all the remote locations of their customers.”
Close to 20 states have eliminated the transaction test, observed Bernard, because it is a litigation risk relative to small internet sellers. In its most recent report on remote sales tax, the Government Accountability Office stated that it “is recommending that Congress consider working with states to establish nationwide parameters for state taxation of remote sales.”
Peterson is struck that five years after the Wayfair decision, so many people were surprised by the outcome. “After 55 years of discussion, it finally happened — and states got the green light to compel out-of-state businesses with no physical nexus to collect and remit tax on purchases occurring within their state. And, five years on, I’m asked basic questions at seminars and conferences, such as, ‘Why is sales tax so complicated?” and “What is economic nexus?” Lack of simplification is due in part to states that were never part of the SST, and their sales tax systems have never been updated for modern sales tax administration. The 24 SST states only represent half the states, and the other states are out there doing what they want to do.”
Avalara’s forthcoming Fifth Anniversary of Wayfair Survey asked businesses how the Wayfair decision impacted them, and found that 72% said online sales tax requirements are complex and confusing — and many of these businesses have been collecting the taxes during the five years since Wayfair. Significantly, for the first time since running the annual survey, Avalara heard that businesses had to raise prices for customers due to the complexity of sales tax compliance.
States are collecting tens of millions of dollars in sales tax post-Wayfair, so they’re thrilled and they feel SCOTUS made the right decision, according to Peterson: “The businesses that were part of the Main Street Fairness Coalition are happy with the Wayfair decision and ensuing state actions. They now feel competitors are not undercutting their prices, or having an unfair advantage over them, as they were prior to June 21, 2018.”
One of the most recent impacts of the Wayfair decision is the retail delivery fee, which originated in Colorado.
It’s simply a 27-cent fee, but in practice it’s very complicated, according to Peterson. “For out-of-state businesses, it’s a big hit, much more than in-state businesses with customers that may come into the physical store. In Minnesota, there’s no delivery fee if the product sold is not subject to sales tax [for example, an exempt hospital] but the fee would apply if that same item was delivered to a non-exempt business. Complexity reigns, since Minnesota exempts sellers with less than $1 million in annual sales, so the big players, such as Amazon, are most impacted. I expect more states to follow Minnesota and Colorado, and this phenomenon would not be occurring without the green light delivered to states by the Wayfair decision.”