In an emergency July 19 meeting, the Streamlined Sales and Use Tax Governing Board came to grips with the immense job before them in the wake of the June 21 U.S. Supreme Court ruling in South Dakota v. Wayfair, which overturned barriers to internet sales-tax collection.
With accolades for victory, speakers said implementation will be a major challenge, but they are confident that work done on the Streamlined Sales and Use Tax Agreement (SSUTA) during the past 18 years will be foundational to simplify how sales taxes on online purchases will be collected and distributed.
The board oversees a national system for 24 participating states that automates the tax settlement process through a simplified software and administrative structure. It formed in 2000 after the 1992 Quill decision that exempted sales taxes for online or catalog sales, and also created the concept of nexus—or requiring taxes only if a seller had a physical location in a state. The SSUTA goal has been to solve the nexus problem by removing undue collection and administrative burdens.
The recent Supreme Court ruling ended the nexus requirement, saying technology and new methods can overcome previous burdens.
The Court actually remanded the case back to the South Dakota Supreme Court and lower state courts for review, Andy Gerlach, South Dakota’s Department of Revenue secretary, told about 150 people at the meeting and another approximately 200 people observing online. He estimated that the initial Circuit Court where the case was filed is likely to affirm the higher court’s ruling, but that no official action could be taken until after that, perhaps in August or September.
Gerlach also stated that even with a successful remand, “Wayfair is not final.” He said the Court overturned Quill’s physical presence requirement as “unsound and incorrect,” but believes there will more be challenges on other details, such as exemption levels to collecting from remote sellers.
Because the Court recognized that a threshold is needed, Gerlach said the $100,000 annual limit or 200 annual transactions in the Wayfair case could be seen as reasonable. However, the amount could be challenged. He said the further states move away from the Mayfair exemptions—such as making them less—could increase the risk of legal challenges to state laws.
Gerlach also said that the ruling doesn’t prevent Congress from limiting state authority in sales tax areas or applying other constraints based on interstate commerce concerns. Congress has scheduled a hearing on the Wayfair decision the week of July 23. The hearing will review various Marketplace Fairness Act proposals seeking to level the playing field for local businesses that compete with online-only and affiliate sellers that don’t collect and remit sales taxes. Other congressional factions are pushing to reinstate and codify Quill’s nexus requirements, which would maintain the status quo.
The U.S. Supreme Court specifically mentioned in its ruling that states’ that add taxation burdens for out-of-state companies might be seen as discriminatory because it could put burdens on out-of-state sellers not put on local sellers. Gerlach said this is new thinking in taxation that could affect local taxation jurisdictions.
Also critical in new tax implementation is that states cannot establish any retroactive taxes once a start date is established to collect online sales and use taxes.
Craig Johnson, the Governing Board’s executive director, said the agency is talking with non-participating states to see if there are ways to expedite joining the nonprofit agency. He said the complexities of local taxing jurisdictions, such as cities, school boards, etc., have kept states from joining up. They would have to simplify their state tax systems so there would be a single entity that would collect and distribute collected taxes, as required by the SSUTA.
Johnson emphasized that the Governing Board and its member states are being watched to provide a workable path to streamline sales tax collection and pointed out the Court referred to several points included in the Sales and Use Tax Agreement as foundational principles, such as simplified state tax laws and uniform definition of products and services.