South Dakota v. Wayfair - five years later.

• Author: Jensen, Jennifer W.

On June 21, 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. (1) in favor of South Dakota's imposition of sales tax collection obligations on remote sellers meeting economic thresholds based on in-state receipts or transaction volume. In this landmark decision, the Court overturned the "physical presence" requirement for sales tax nexus set forth in National Bellas Hess, Inc. v. Department of Revenue of Illinois (1) in 1967 and subsequently affirmed in Quill Corp. v. North Dakota (3) in 1992.

This column provides an overview of the expected and unexpected tax impacts of the Wayfair ruling, as well as the operational implications for taxpayers. From states applying Wayfair to other types of taxes, to potential sales tax overpayments as a result of vendors operating in new jurisdictions, this column walks through what taxpayers are experiencing five years later and how the changing landscape may impact businesses going forward.

Expected and unexpected impacts of Wayfair

Expected or unexpected? We will let you decide. Below is a discussion of what the authors believe are some of the outcomes of the Wayfair ruling with the biggest impact.

Widespread adoption of sales tax economic nexus laws

Post- Wayfair, it is not surprising that states and localities began enacting sales tax economic nexus laws and issuing guidance similar to South Dakota's. In fact, in anticipation of the Wayfair decision, some states had laws in place or on hold that were in direct conflict with Quill; thus, once the Supreme Court ruled, those states could begin enforcing economic nexus. For example, New York Tax Law Section 1101(b) (8)(iv) established sales tax economic nexus standards that had sat dormant for almost 30 years until the Wayfair ruling. Months after Wayfair, New York issued guidance notifying taxpayers of its intent to enforce the dormant provisions, effective back to the date of the Wayfair decision.

While enactment of sales tax economic nexus laws was expected, what was surprising was how quickly these laws were adopted across all states with sales taxes. Most of the states, except for a few holdouts, had effective economic sales tax nexus standards in place within two years of the Court's decision. In comparison, states have been grappling for over a decade with how to tax new technologies in an increasingly service-oriented economy.

As of Jan. 1, 2023, all states with a sales tax had enacted sales tax economic nexus.

Lack of uniformity in economic nexus thresholds

Using South Dakota's law as a template, all applicable states have adopted a dollar threshold, and many have a transaction threshold. However, the state rules did not completely mirror one another, and several economic nexus standard variations began to appear.

The scope and magnitude of these variations have made the seemingly simple concept of economic nexus difficult for taxpayers to monitor and analyze. As economic nexus laws were enacted and guidance proliferated, the lack of uniformity among the thresholds, effective dates, and other criteria made compliance challenging. Some examples:

* Beginning effective dates range from June 21, 2018, in New York to Jan. 1, 2023, in Missouri.

* A dollar or transaction threshold may trigger nexus in some jurisdictions, such as Georgia and Kentucky, while a dollar and transaction threshold has to be met to trigger nexus in others, such as New York and Connecticut. Further, many states, such as Washington and Wisconsin, have only a dollar threshold.

* Dollar thresholds range from $100,000 to $500,000 and vary in their composition among gross sales, taxable sales, and sales of tangible personal property. Moreover, taxability of products and services varies by state, and states define tangible personal property differently For example, California's and New York's economic nexus laws both specify that only tangible personal property is included in the economic nexus threshold. However, if asked whether electronically downloaded software qualifies as tangible personal property, California would say no, (4) but New York would disagree. (5)

* Sales made through marketplace facilitators are included in economic nexus thresholds in some jurisdictions, such as California, and excluded in others, such as Florida.

* The period in which the economic nexus standard applies can be the prior calendar year, such as in Michigan; the prior or current calendar year, as used by Hawaii; a rolling 12 months, as adopted in Tennessee; or some other period. The AICPA highlighted the complexities companies face as a result of the lack of uniformity of economic nexus thresholds in its Written Statementfor the Senate Committee on Financed For example, the AICPA noted that "for purposes of determining whether the transactional threshold has been met, businesses have no clear definition for the term 'transaction.Tt is unclear whether a transaction is considered each line within an invoice, an entire invoice or a contract that is billed in installments."

The definition of a "transaction" has indeed been surprisingly challenging for taxpayers and has resulted in unexpected consequences. Taxpayers with high-volume but low-dollar sales could have minimal revenue in a state but still be required to comply because of a transaction count threshold. In light of this unexpected complexity and states'concerns about the repercussions of enforcement, a positive trend has been an elimination of the transaction count threshold in an increasing number of states. With the...