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On June 21, 2018, the United States Supreme Court abrogated long-standing precedent prohibiting states from requiring the collection of use tax by out-of-state retailers not having a physical presence in that state. The 5-4 South Dakota v. Wayfair, Inc., et al. decision was not the normal liberal and conservative split of Justices, and it continues a recent string of cases where the highest Court upheld State’s rights. This fundamental shift sent shockwaves through the e-commerce universe.
The e-commerce industry was birthed and has only lived in a world where physical presence is the Constitutional trigger for the duty to register, collect, and remit sales taxes to a state. Not anymore. The Wayfair Court overturned more than fifty years of stare decisis by finding both Quill and National Bellas Hess were decided erroneously. We discussed the importance of those two cases in greater detail in our February 8th article discussing the significance of the Supreme Court accepting the Wayfair case. The Court blessed a South Dakota law which requires sellers to collect and remit sales tax if the seller (1) annually delivers more than $100,000 of goods or services into South Dakota or (2) engages in 200 or more separate transactions to deliver goods or services into South Dakota. Additionally, the decision appeared to condone other economic nexus concepts previously pushed by many other states including “click through” nexus, “cookie” nexus, and reporting requirements.
In the absence of the Quill and National Bellas Hess, retailers must now look to the broad guidelines set forth in Complete Auto:
- Does the tax apply to an activity with a substantial nexus with the taxing State,
- Is the tax fairly apportioned,
- Does the tax discriminate against interstate commerce, and
- Is the tax fairly related to the services the State provides.
The Wayfair Court further opined “nexus is established when the taxpayer or collector avails itself of the substantial privilege of carrying on business’ in that jurisdiction” without providing additional guidance to such phrase.
In a Post-Wayfair World, the $100,000 (or 200 transactions)
question becomes, what happens next?
Is Wayfair Retroactive?
Here, the Court concluded the physical presence test in Quill and National Bellas Hess was “unsound and incorrect” and blamed itself for the “[unsupported] prohibition of a valid exercise of the States’ sovereign power [to tax].” So, should Wayfair be applied retroactively? After all, the Due Process and Commerce Clauses of the U.S. Constitution have not changed.
Ultimately, the Wayfair Court did not squarely articulate that a retroactive state law providing the same economic thresholds for nexus would be constitutional. However, the Court made clear the prospective nature of South Dakota’s law was a factor contributing to its constitutionality. The Court states, for example, that the South Dakota law affords “a reasonable degree of protection” because it “requires a merchant to collect the tax only if it does a considerable amount of business in the State” and because “the law is not retroactive.” Therefore, retroactivity becomes a factor in determining if a state law unconstitutionally discriminates against or creates undue burdens on interstate commerce.
Additionally, the test in Chevron may provide support to argue against an attempted retroactive application of Wayfair. In Chevron, a decision may be applied purely prospectively if:
- The court’s decision overruled settled precedent on which the parties may have relied;
- The history of the jurisprudence in the affected area of law, together with the new rule’s purpose and effect disfavor retroactive application; and
- Retroactive application would give rise to substantial inequity.
One could argue that the Wayfair Court’s reversal of over fifty years of stare decisis seems to meet all three Chevron prongs. However, the weight of authority given to Chevron has diminished over time. In Harper v. Va. Dep’t of Taxation, the Supreme Court concluded that rulings applied to parties “must be given full retroactive effect.” The Court later recognized there is some “continuing validity of Chevron Oil after Harper,” leaving the door slightly ajar for arguments in favor of prospective application in Ryder v. United States.
The Wayfair Court specifically addressed both reliance and the potential for substantial inequities factors. Regarding reliance, the Court recognized such “interests are a legitimate consideration when the Court weighs adherence to an earlier but flawed precedent.” However, the Court concluded “the physical presence rule as defined by Quill is no longer a clear or easily applicable standard, so arguments for reliance based on its clarity are misplaced.” Regarding inequities, the Court recognized the argument that retroactive application “risks a double tax burden in violation of the Court’s apportionment jurisprudence because it would make both the buyer and the seller legally liable for collecting and remitting the tax on a transaction intended to be taxed only once.”
The Supreme Court approved the South Dakota’s prospective application of economic nexus. The Court did not shut the door on other states attempting a similar retroactive law. Which state(s) will attempt to step through that door?
What Does Florida Do?
Florida has a longstanding law regarding the taxation of mail order sales. After National Bellas Hess, many states reacted by enacting laws attempting to tax mail order sales and challenging the continued validity of the physical presence rule. Enforcement of these “anti-Bellas Hess” laws led to the Court’s decision in Quill affirming the physical presence rule. Now that both Quill and National Bellas Hess have been thrown out, such laws are arguably expanded without additional legislative action.
Florida’s “mail order” sales statute applies to any sale of tangible personal property ordered by mail or other means of communication, which includes the Internet, from a dealer who receives the order in another state and causes the property to be transported, whether or not by mail, to a person in this state. This law was initially enacted in 1987, during the Internet’s infancy and before websites. Florida’s law generally allows an out-of-state retailer making a “mail order” sale to be exempt from collecting and remitting any local option surtax on the sale. The law also allows the Department of Revenue to grant certain concessions for the collection of use tax from unregistered businesses, which would otherwise not be required to remit sales or use tax to the Department but for its mail order purchases. Such concessions may provide for waiver of registration, provisions for irregular remittance of tax, elimination of the collection allowance, and nonapplication of local option surtaxes.
While states’ revenue departments may be authorized to aggressively pursue new businesses under Wayfair without a physical presence in the state, it would be very wise for unelected officials to delay such actions and wait for executive or legislative direction. Certainly, many states will actively chase new revenue sources in the wake of the Court’s decision, but other state officials may decide otherwise, such as West Virginia Governor Justice. Most importantly, the elected officials should control the tax policies of each state. Not an auditor interpreting a thirty-year old statute.
The Wayfair decision caused a significant shock to state tax systems across the nation. States, including Florida, should take the time to develop clear guidelines for businesses consistent with the discussion in the case. Ultimately, the dollars and cents collected and remitted as a result of Wayfair isn’t going to be what kills a business. The business killers are the uncertainty and burdens that come with the tax administration.
Businesses located outside of Florida seeking assistance related to the potential ramifications of Wayfair or those contacted by the Florida Department of Revenue regarding compliance should contact a member of our State and Local Tax Team for assistance.
It was clear during oral arguments that a retailer would have the obligation to collect and remit tax even if there were a single transaction in excess of $100,000 in South Dakota.