South Dakota v. Wayfair — five years later

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 Illinois² in 1967 and subsequently affirmed in Quill Corp. v. North Dakota³ 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 Statement for the Senate Committee on Finance.⁶ 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.’ It 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 most recent removal of transaction counts in South Dakota,⁷ the authors anticipate this movement will continue.

Implementation of marketplace facilitator laws

The adoption of economic nexus laws for remote sellers has been accompanied by the enactment of sales tax economic nexus for marketplace facilitators. While previously defined in only a handful of jurisdictions, in the five years post- Wayfair, all states with a sales tax have enacted economic nexus for marketplace facilitators, requiring facilitators to collect and remit sales tax on facilitated sales.

For many states, this development has meant writing marketplace facilitator definitions into law and revising long-standing definitions of what constitutes a retailer or a dealer responsible for collecting the tax. No standard definition of marketplace facilitator is agreed upon by all states, and the definitions’ application ranges from narrow to broad. Nonetheless, the authors see as a common trait that a marketplace facilitator lists or advertises products or services for sale on behalf of marketplace sellers and collects payment from the purchaser, as outlined in a white paper by the Multistate Tax Commission’s (MTC’s) Wayfair Implementation and Marketplace Facilitator Work Group.

Beyond definitions, the states differ as to tax collection, remittance, and information-retention requirements for marketplace facilitators. Some notable differences include exclusions of specific industries, such as certain local delivery networks in California and Florida; availability of waivers allowing marketplace sellers, rather than facilitators, to collect and remit tax, as in Minnesota and Ohio; and marketplace information collection requirements, as in Colorado and Illinois. Marketplace facilitators need to analyze whether they fall within the definition of a retailer in the state, when they are responsible for collecting, which of their charges and fees are subject to tax, and which tax types they are responsible for collecting.

The widespread implementation of economic nexus with respect to marketplace facilitators, together with the differing laws and requirements, has drastically changed the landscape of what is required of them. Marketplace facilitators need to monitor evolving laws to comply. While the extension of economic nexus to marketplace facilitators may have been expected, many of the complexities that followed were not.

Filing footprint expansion

In the years leading up to the Wayfair decision, jurisdictions adopted a variety of standards to increase sales tax revenue from remote sellers and marketplace facilitators through expansion of nexus definitions and reporting requirements. These included widespread adoption of affiliate nexus and click-through nexus, both of which were meant to describe situations where the pre-Wayfair standard of physical presence would be treated as satisfied by various business relationships; “cookie nexus” as pursued by Massachusetts, which viewed electronic interactions that left software (cookies) on customers’ computers as constituting physical presence; and use tax notice-and-reporting requirements for remote sellers that did not voluntarily register to collect and remit tax.

While filing footprints of some companies increased during this time, other remote sellers remained registered only in those states in which they had a traditional physical presence (i.e., property and payroll). Five years after the Wayfair decision, companies that once were primarily concerned with physical presence and perhaps were required to collect and remit sales tax only in a handful of states now must be familiar with both their physical footprint as well as the economic nexus thresholds in every state in which they make sales. Bright-line economic nexus laws have swept the country, and compliant companies have seen their sales tax filing footprints increase exponentially.

In the years following the Wayfair decision, the authors saw some jurisdictions take a more lenient approach on remote sellers that were late to comply with economic nexus effective dates, sometimes waiving penalties or providing forgiveness for prior periods if those sellers became compliant going forward. However, this trend may have come to an end. Companies that currently are not in compliance should review their activities for sales tax nexus and take actions to come into compliance.

Lack of uniformity in definitions, taxability, sourcing, rates, filing frequencies, and compliance responsibilities

Whether it is expected or unexpected, states have made minimal progress since Wayfair to further harmonize sales tax definitions, taxability, sourcing, rates, filing frequencies, and compliance responsibilities. Lack of uniformity is familiar territory for sales tax professionals, but as filing footprints expand, the resulting challenges for remote sellers and marketplace facilitators are amplified.

While not a uniform change per se, there has been a notable movement in multiple states’ sales tax sourcing laws. To take full advantage of the revenue benefits Wayfair can offer, some historically origin-based states that previously sourced sales to the sellers’ location have changed their sourcing laws to implement some form of destination-based sourcing. These include Colorado and Illinois, which prior to these legislative updates had origin-based sourcing for local tax imposition. For remote sellers, this meant collecting tax only at the state use tax rate. To put the impact of these sourcing laws into perspective, in Illinois, this meant the difference between collecting tax at 6.25% (the state rate) versus up to 11.5% in certain local jurisdictions.

A change to a state’s sourcing laws or guidance is a substantial development. When the change results in different tax treatment for intrastate and interstate transactions, it can create additional complexities for implementation and raise interstate commerce concerns. Particularly troublesome is when interstate transactions or remote sales result in higher tax rates than intrastate transactions, which happened in Colorado. Beginning in June 2019, Colo. Rev. Stat. Section 39-26-102 was updated for remote sellers that meet economic nexus thresholds, imposing destination-based sales tax sourcing on sales made into the state. However, sourcing for intrastate sales from small businesses with less than $100,000 in annual sales remained origin-based until October 2022, creating a period where substantially the same sale to the same jurisdiction could result in a higher rate charged by a remote seller than by an in-state seller, depending on the local jurisdiction.

Economic nexus is not limited to state sales tax

One typically hears that 45 states and the District of Columbia impose a sales tax. In reality, 45 states and many localities impose and administer their own sales taxes. The latter include the District of Columbia and, for example, 300-plus localities in Alabama, 70-plus localities in Colorado, 60-plus parishes in Louisiana, and 100-plus localities in Alaska. In the sales tax world, localities in states that allow for the local administration of sales tax are collectively referred to as the home rule jurisdictions.

Given South Dakota’s centralized administration of sales tax, locally administered sales taxes were not addressed as a part of the Wayfair decision. In the years after the decision, discussions and predictions concerning the imposition of economic nexus on locally administered sales taxes progressed from whether it would happen to when and how. Five years later, as a result of Wayfair and the powers some states give localities, many home rule localities have implemented sales tax economic nexus.

To simplify and encourage compliance by remote sellers, the states with home rule localities all have implemented some form of centralized sales tax collection for remote sellers. Unfortunately, centralized collection is about the only thing that programs in the four states mentioned above have in common.

Alabama’s Simplified Sellers Use Tax program allows remote sellers to collect and remit at a flat rate, but Alaska’s Remote Seller Sales Tax Commission, Colorado’s Sales and Use Tax System, and Louisiana’s Sales and Use Tax Commission for Remote Sellers require sellers to collect and remit taxes based on the localities’ varying tax rates, definitions, and taxability. Participation in the programs by the localities, how and whether economic nexus standards apply to localities, and who is able to use the centralized collection programs all vary by state.

While states with local sales tax administration have made some movement toward centralized administration and streamlined rules, the pace of that change and its sufficiency is being challenged in litigation, including in Colorado and Louisiana. The outcome of this litigation and the states’ responses will shape the tax-compliance landscape for remote sellers operating in home rule jurisdictions in the years to come.

Other indirect tax types and industries impacted

The implications of the Wayfair decision do not end with sales tax. Unless you work in or with one of the specialized industries affected or pay extremely close attention to your receipts, you may not be aware of the other indirect tax types and fees that can apply to your purchases of goods and services. Over the last five years, states’ economic nexus laws have expanded rapidly to include them.

Indirect tax types affected include amusement taxes, such as the Chicago amusement tax; meals taxes, as illustrated by the Indiana food and beverage tax; and accommodation taxes, such as the Wyoming lodging tax. There also has been an uptick in the responsibility of marketplace facilitators for collecting various service charges and fees, such as prepaid wireless 911 fees and waste tire fees in North Carolina and Florida. These additions require remote sellers and marketplace facilitators to keep up with not only changing sales tax laws but also other taxes and fees that may apply.

Companies in these industries face challenges not only because economic nexus laws have expanded to include various tax types but also because many of these taxes are imposed at the local level. Locally administered sales taxes create complexity and increased compliance burdens in a handful of states, but for other tax types, local administration is often the rule, not the exception. For example, accommodation taxes are locally administered in more than half of the U.S. states and account for thousands of locally administered accommodation tax filings. While attempts to impose these taxes on accommodation facilitators, such as online travel companies and short-term rental facilitators, are not new, the volume of jurisdictions that have moved forward with legislation has been swift and continuous post-Wayfair.⁸

Unlike the centralization efforts seen in the home rule jurisdictions relating to sales tax, no such sweeping efforts have gained traction among the states that impose these other locally imposed transaction tax types. For example, accommodation facilitators that meet the economic nexus thresholds in Wisconsin must collect and remit not only sales tax on lodging services, which is state administered, but also municipal room tax directly to the more than 300 municipalities that impose room tax in the state.

The effect of the imposition of economic nexus on other transaction tax types should not be overlooked. For companies in affected industries, this can mean the difference between hundreds and thousands of transaction tax filings.

Overpayments of sales tax

Wayfair resulted in an unprecedented wave of sales tax registrations. Although the lack of uniformity in definitions of products and services and the differences in taxability among jurisdictions always have been a challenge for companies operating in multiple states, Wayfair exacerbated the issues for remote sellers. Over 20 states enacted sales tax economic nexus with effective dates in 2018, giving taxpayers with sales exceeding economic nexus thresholds between zero days and six months to comply.

Needless to say, some deadlines were missed and some mistakes were made, even by diligent taxpayers. Expected or unexpected, one prominent impact of Wayfair the authors have seen for companies is an increase in sales tax overpayments to vendors operating in unfamiliar jurisdictions.

With Wayfair’s fifth anniversary and with sales tax refund statutes of limitation typically ranging between three and four years from when the tax was paid, companies should review their payables, analyze whether the appropriate amount of tax was paid, and consider taking steps to recover overpayments.

Increased need for technology, automation, and outsourcing

Maintaining sales and use tax compliance has become more timeconsuming and resource-intensive for companies of every size as a result of expanded filing footprints brought on by Wayfair. Taking into account the challenges to monitor the varying sales tax rates, definitions, and taxability across the taxing jurisdictions, the authors can confidently say there has never been a greater need for companies to embrace sales tax technology and automation.

The authors have seen a steep increase in the number of companies implementing sales tax technology and automation. While no one-sizefits- all approach addresses expanded sales tax filing footprints, these technologies can save time, helping alleviate the resource strain. Potential solutions to these needs include:

• Extract, transform, and load (ETL) technology to assist in efficiently compiling data for returns;
• Robotic process automation (RPA) technology to automate return completion;
• Tax engines to maintain data on taxability, rates, and calculations; and
• Exemption certificate management software to maintain customer certificates and exemptions.

However, not all companies have the resources, time, budget, or desire to implement sales tax technologies to meet their growing compliance needs, leading some to outsource their sales tax compliance function. With expanded filing footprints, the time required to perform indirect tax compliance may outweigh the benefits, which can make outsourcing an attractive and cost-effective option.

Impact on states’ revenue

The urgency with which nearly every state passed legislation to impose economic nexus thresholds highlights the importance of sales and use tax revenue for state and local governments. The U.S. Government Accountability Office (GAO) in 2022 surveyed state tax departments to measure the amount of sales tax collected from remote sellers between 2018 and 2021 to study the effect of Wayfair on state revenues.⁹

States reported a total of $3.2 billion in revenue collected from remote sellers for the 22 states that provided data for the 2018 reporting period. However, this figure grew more than sevenfold in the years following Wayfair as more states implemented economic nexus standards, with 33 states reporting a total of $23.3 billion in tax collected from remote sellers for the 2021 reporting year.

The survey also requested each state to provide data on the amount of revenue collected from remote sellers that it could ascribe to sales made via marketplace facilitators. Five states provided revenue figures for this question in 2018, amounting to $344 million in tax collected for the reporting year. Three years later, the collected revenue increased to roughly $9.8 billion with 21 states reporting.

The authors continue to see states expand their sales tax bases to include additional services and evolving definitions of software, cloud computing, and digital goods and expect this trend to continue.

It’s not all about transaction tax

Transaction tax is not the only type of tax affected by economic nexus legislation. In fact, before Wayfair, states already had moved substantially in the direction of economic nexus for income taxes.

The MTC in 2002 adopted its “factor presence” nexus standard with an in-state $500,000 receipts threshold, as well as de minimis thresholds for property and payroll ($50,000 each). Starting with Ohio for purposes of its commercial activity tax in 2005,¹⁰ states (including California and New York) slowly have begun shifting toward this standard. As with post- Wayfair sales tax receipts thresholds, these income tax factor-presence thresholds vary.

Sellers of tangible personal property have an additional protection from imposition of net income taxes, such as those in California and New York, although not for gross receipts taxes, such as in Ohio.

P.L. 86-272, the federal Interstate Income Act of 1959, bars states and localities from imposing income taxes on companies engaged in interstate commerce as long as their in-state business activities are limited to the solicitation of orders for sales. Post-Wayfair, states seem to be pushing the boundaries of this federal law. The MTC in August 2021 adopted a revised “Statement of Information” on the application of P.L. 86-272, taking the position that taxpayers generally engage in unprotected in-state business activities “when a business interacts with a customer via the business’s website or app.” For more on this development and state responses, see DeBruin and Smith, “Tax Clinic: Consequences of the MTC’s Revised Interpretation of P.L. 86-272,” 54-5 The Tax Adviser 17 (May 2023), and Jones, “States’ Reactions to MTC’s Application of P.L. 86-272 to Internet Sales,” 53-12 The Tax Adviser 44 (December 2022).

Fundamental questions remain

Five years after the Wayfair decision, sales tax collection and remittance requirements for remote sellers and marketplace facilitators have been adopted by all states that impose a sales tax. Digging through the details, however, reveals uncertainties over such foundational questions as who bears the burden of collecting and remitting tax, to what products taxes apply, and what transactions are covered.

Sales and use tax complexity is attributable at least in part to the U.S. federal-state system of government, allowing the “laboratories of democracy” to reflect their own policy decisions in their disparate tax laws. Perhaps, then, it is not surprising that a rapid, multistate response to the Wayfair decision has compounded state tax complexity. A comprehensive, technological, and process-driven compliance function is key for taxpayers to navigate the post- Wayfair world.

Contributors

Jennifer W. Jensen, CPA, is a partner with PwC in Washington, D.C.; Daniela Wilps, CPA, is a director with PwC in Pittsburgh; Ferdinand Hogroian, J.D., is a director with PwC in Albany, N.Y.; and Matthew Gillespie is a manager with PwC in Pittsburgh. Mo Bell-Jacobs, J.D., is senior manager of State and Local Tax, Washington National Tax, at RSM US LLP in the Washington, D.C., area. Bell-Jacobs is chair, and Wilps is a member, of the AICPA State and Local Tax Technical Resource Panel. For more information about this column, contact thetaxadviser@aicpa.org.

Footnotes

¹ South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

² National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).

³ Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

⁴ Cal. Code Regs. tit. 18, §1502(f)(1)(D).

⁵ N.Y. Dep’t of Taxation and Finance, Tax Bulletin ST-128 (Aug. 5, 2014).

⁶ Senate Finance Committee, hearing on “Examining the Impact of South Dakota v. Wayfair on Small Businesses and Remote Sales” (June 14, 2022).

⁷ Senate Bill 30, amending S.D. Codified Laws §10-64-2, effective July 1, 2023.

⁸ See Duncan and McGahan, “Locally Administered Sales and Accommodations Taxes: Do They Comport With Wayfair?” State Tax Research Institute (July 2022).

⁹ Remote Sales Tax: Federal Legislation Could Resolve Some Uncertainties and Improve Overall System, Government Accountability Office, Rep’t No. GAO-23-105359 (Nov. 14, 2022).

¹⁰ Ohio Rev. Code §5751.01(I).