The U.S. Supreme Court's ruling in South Dakota v. Wayfair Inc., No. 17-494 (U.S. 6/21/18), and the passage of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, have had the greatest impact on state and local tax (SALT) practice in decades, positioning SALT issues to be a leading consideration in the overall tax landscape in the 2019 tax return preparation season. While the reverberation of tax legislation can sometimes take months or longer to take hold, Wayfair and the TCJA began to make waves in just weeks across the country. For taxpayers and tax professionals this means SALT's influence is now greater than ever, drawing more attention to the key role indirect taxes play in a comprehensive tax strategy.
Wayfair overturned 26 years of precedent (see Quill Corp. v. North Dakota, 504 U.S. 298 (1992)) by changing the nexus landscape from a physical presence to more of an economic influence considering how companies do business in today's digital climate. Over the past two decades it has been challenging for states to meet budget requirements, and some would assert that this problem can be attributed to out-of-state retailers' being able to skirt their sales tax responsibilities thanks to the precedent from Quill, which was decided in a less digital world.
Once the opinion was handed down in Wayfair, it did not take long for states to act and enforce sales tax requirements on their out-of-state sellers. Before this landmark decision, just 20 states had some sort of economic nexus standard on the books or in the works. Within eight weeks after it, that number was up to 30 and growing. The case has also opened the door for states without a sales tax to reconsider implementing one as e-commerce becomes the norm.
On the taxpayer side, misconceptions exist that because remote sellers were not charging sales tax on their goods, those transactions were tax-exempt. In reality, those transactions were supposed to be reported on use tax returns, but very few consumers complied with these obligations. Going forward, individuals will likely have to start paying sales tax on more of their out-of-state purchases, which can be seen as leveling the playing field between e-commerce and brick-and-mortar retailers.
The TCJA's capping of the individual SALT deduction at $10,000 has further caused states to rethink the composition of their budgets. This legislation is affecting high-tax states more than others, initially resulting in some creative workarounds related to charitable contribution deductions. The IRS has already issued proposed regulations to combat that (see REG-112176-18).
As the impact of these events wears on and they are applied in an increasingly mobile and digital economy, these indirect taxes could have a greater impact on residency trends as taxpayers opt to move to lower-tax states where they can get the full federal tax deduction. This possibility puts greater pressure on members of Congress to find solutions for their constituents in light of the changes to the individual SALT deduction. Pair that with the possibility of population shifts in a mobile workforce, and there could be a real challenge in some parts of the country.
Going into 2019, it behooves tax preparers to be more cognizant of the legislative landscape as the new economic nexus standards incite changes across the states. Although some states have enacted new nexus standards, some are still pending litigation and enforcement, meaning that changes are still to come. SALT professionals will need to keep an eye on developments on a state-by-state basis.
In light of the changes in SALT issues this year, and the changes still to come, it's more important than ever not to lose sight of the opportunities available for lowering the indirect tax burden.
Michael D. Koppel, CPA (Retired)/PFS/CITP, is a retired partner with Gray, Gray & Gray LLP in Canton, Mass.
For additional information about these items, contact Mr. Koppel at 781-407-0300 or email@example.com.
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