Looking back at South Dakota v. Wayfair
Three years ago last month, the U.S. Supreme Court ruled in South Dakota v. Wayfair that individual states could require online retailers to collect sales taxes based on retailers’ economic activity in those states. Before the decision, a physical presence by the retailer in a particular state was necessary to make that company subject to state tax collection.
Needless to say, the decision opened the floodgates as states rapidly proliferated what are known as “economic nexus laws.” At last count, 45 states have such legislation, plus Washington, D.C., with Florida becoming the 45th to join the taxation ranks on July 1. Oh, and Missouri’s is coming in 2023.
Now, if there’s anything I like to think and write about, it’s tax law. So, let’s get into the weeds.
Beyond adding cost to consumer purchases, the high court decision initiated a patchwork of laws that vary state by state by state, compounding the complexity of doing business online. In furniture, e-commerce is dominated not coincidentally by Wayfair, which recently posted quarterly net revenue of nearly $4 billion.
A state-by-state guide to tax collection obligations is here.
To illustrate the great variety in the economic nexus laws, in my home state of Georgia, an online retailer is subject to collecting per transaction sales tax if that company processes 200 or more remote sales transactions with Georgia residents or if any one transaction tops $100,000. This is not typical, however, and clearly it presents smaller businesses with yet another burden in terms of compliance, a disadvantage the high court majority largely dismissed as trivial.
I haven’t checked on state tax rates recently, but in 2018, California not surprisingly had the highest at 7.25% and Colorado had the lowest at 2.9%.
The global pandemic has only heightened concerns relating to the Wayfair tax laws as furniture retailers have looked to online to mitigate restrictions on in-person shopping. With the Delta variant blazing across the country and the return of spikes in case and hospitalization rates, the trend toward combining bricks-and-mortar with an online presence is only going to grow. This is, of course, great news to technology companies and software providers, both in home furnishings and in accountancy.
Tech and software are the only reasonable solutions to track and comply with the many and varied legal rules, track the location of purchasers both in terms of state jurisdiction and locality, factor in filing deadlines, and, in some circumstances, adjust for loopholes, such as those in New Jersey and Delaware. Oh, and if the delivery destination is different than the location of the buyer? Or the product is returned? The price adjusted? Did I mention that my head was about to explode? And let’s not even mention audits and the many jurisdictions that might want one.
Blending online and in-person store experiences can, however, lower the tax burden to the individual consumer, at least in some cases. A resident of Utah buying from an e-tailer physically located in South Carolina, for example, lowers his or her tax by roughly 1.15 percent because Utah’s tax rate is lower than South Carolina’s.
But there is a caveat: If the furniture retailer is trading on a third-party marketplace, this could trigger additional liability via marketplace facilitator laws. Now, before my head explodes, I’ll just say that new channels bring with them new tax obligations and complexities that vary state by state and even locality by locality.
Even before the Wayfair ruling, complexity and variety ruled.
At the time of the Wayfair decision, 45 states and D.C. had broad-based statutes. Only six states looked only at whether the retailer had a physical presence in those states, with another 15 using presence plus other criteria.
In addition, the states continue to tweak their laws regarding e-commerce, as Tennessee just did in lowering its threshold for transaction amounts.
Wisdom in dissent
I have always been a big fan of Chief Justice John Roberts (the dude can write!), and his dissent in the Wayfair case only added to my admiration. Roberts persuasively emphasized the likely negative effects of the ruling on smaller concerns relative to larger e-commerce players with already sophisticated Internet platforms. Roberts’s dissent acknowledged the dizzying complexity created by what are 10,000 different state and local jurisdictions levying sales taxes that vary depending on rates and rules and product or service category.
Specifically, Roberts’s dissent, which was joined by justices Breyer, Sotomayor and Kagan, argued for congressional action on this issue rather than relying on a court ruling. Congress, with its many committees and legislative powers, particularly regarding interstate commerce, is better situated to coordinate a solution than is any one court decision, bounded as that decision inevitably is to the circumstances of the particular case brought before the court.
Smaller furniture retailers need predictability and stability in tax law at a time when pandemic has upset and rattled patterns and norms in virtually every facet of American life, none more so than shopping and buying consumer goods.
My guess is that Wayfair and Amazon power through. But startups and small and medium-sized companies face a tough road. The majority opinion in the Wayfair case swatted away this inequity as merely “temporary.” In a pandemic, however, “temporary” can be the difference between survival and having to shut the doors for good.
“Eventually software that is available at a reasonable cost may make it easier for small businesses to cope with these problems,” the majority reasoned. “Those systems may become available in a short period of time.” Sure, they may, but they might not, as well.
Federal legislation could address and even remove many of the complexities to level the playing field for businesses competing in a tough space during a difficult era of American retailing.