More Post-Wayfair Thoughts: Sales Tax?

By now, anyone who reads this post should be aware that the Supreme Court decided South Dakota v. Wayfair and overruled its physical presence rule last week. States now have expanded authority to require the collection of their consumption taxes by remote vendors like online retailers. Coverage of the case and its impact on states and vendors has been widespread, including my preliminary thoughts offered on this blog and with Darien Shanske and David Gamage elsewhere.

One aspect of the coverage that would usually drive state tax aficionados crazy is the continued reference to the case as involving sales tax.

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For a long time, many of us have smugly corrected folks (often only in our own minds) and noted that it is the state use tax that is at issue when we are talking about online sales. That may be no more.

The South Dakota law that was challenged in Wayfair indeed requires remote vendors to collect the state’s sales tax rather than the state’s use tax. Historically, that would have been a big problem, but it didn’t trouble Justice Kennedy or the other members of the majority. This may require broader thinking than just analyzing what Wayfair means about states’ powers over remote vendors. The Court’s decision in Wayfair may have done much more than just overrule Quill; it may have unsettled some even longer-standing doctrine in this area.

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South Dakota v. Wayfair: First Impressions

The Supreme Court issued a 5-4 decision overruling its long-standing physical presence rule in South Dakota v. Wayfair this morning. That decision provides welcomed relief to states (and to those of us who already pay use tax) and will have significant short- and long-term consequences. My reactions to Wayfair will surely extend for a long period of time, but here are some brief first thoughts.

The Basics

The Court’s holding was very limited: the physical presence rule no longer governs the determination of what constitutes a “substantial nexus” under the dormant Commerce Clause. The Court also found that nexus existed in the case based on the challengers’ connections with South Dakota. Finally, the Court did not bless the South Dakota statute completely, but remanded the decision back to the South Dakota courts to hear non-nexus based challenges to the law, if any exist.

What this means is that states will be able to continue (or expand) their efforts to require the collection of sales/use tax by online vendors. States will also need to monitor whether and how Congress responds, but they should be able to craft their laws to avoid state-court scrutiny until that time.

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Undue Burdens and the Retroactivity Issue in Wayfair

By Adam Thimmesch

The major question presented in South Dakota v. Wayfair is whether the Supreme Court should overturn its long-standing physical presence limitation on state taxing power. (I believe that it should, as do most people who have studied the issue.) One of the secondary issues presented in Wayfair is whether the Court could apply such a repeal on a prospective basis only or whether a repeal would have to apply retroactively. Daniel Hemel had a great post introducing this issue last month, but I think that it is worth adding another dimension to the analysis.

The retroactivity issue presents itself as obvious in some respects—why couldn’t the Court issue a prospective only decision? And yet, this issue has troubled the Court, and it appeared as a consideration in Quill itself. The retroactivity issue is also being addressed in the briefs in the case (South Dakota’s merits brief was filed on Monday), and the Court is sure to bring up the issue in oral arguments in April. It seems possible that the Court would have enough votes to overturn Quill on its merits, but that no clear majority would appear regarding the retroactivity of its holding. Worst case, disagreement about that issue could cause some Justices to get cold feet on the primary issue. For these reasons, it is worth exploring retroactivity from a couple of different angles.

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The Future of Nexus

By Adam Thimmesch

As I’ve previously blogged, the Supreme Court granted certiorari in South Dakota v. Wayfair last month. The question presented in the cert petition was whether the Court should overrule the physical-presence rule of Quill. For most folks, the resolution of the case will be felt most directly in whether their favorite online stores start to collect use tax on their purchases. (If your favorite vendor is Amazon, fear not, you’re already paying…at least on some of your purchases.) For states, it could mean an infusion of tax revenue at a time when many are struggling with budget issues…or maybe they will use the funds to pay for President Trump’s infrastructure plan.

The primary issue in Wayfair is whether the Court should abandon its long-standing physical-presence rule. That rule dates back to the Court’s early regulation of states and how they taxed the itinerant drummers and mail-order companies of the 1800s and early 1900s. The Court originally imposed that jurisdictional limitation under both the Due Process and dormant Commerce Clauses, but it abandoned the former with its 1967 decision in National Bellas Hess v. Illinois. (Lawyers reading this post should remember something about personal jurisdiction and the Court’s move away from a physical-presences test for purposes of that concept during this same time frame.)

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Supreme Court Agrees to Hear South Dakota v. Wayfair (!)

By Adam Thimmesch

The Supreme Court announced this afternoon that it will hear arguments in South Dakota v. Wayfair, the anti-Quill case that has been fast tracked for the Supreme Court since 2016. That decision means that the physical-presence rule, long-abhorred by states and tax academics, might be coming to an end. Of course, a reversal is not certain, and the Court could uphold that rule after hearing the case on the merits. Regardless of the ultimate outcome, however, the Court agreeing to hear it means that those involved in state taxes will have plenty to write about in the coming months.

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Opening Volleys in South Dakota v. Wayfair

By Adam Thimmesch

Much of the tax world is currently focused on federal tax reform, and rightfully so. The speed with which the Republicans are pushing a bill through Congress has required an intense burst of attention, and academics evaluating the bill have already noted and written on number of glitches and loopholes in the current bills. (Full paper here.) While this is all occurring, though, a significant case is being pitched to the U.S. Supreme Court—South Dakota v. Wayfair. That case involves the Court’s physical-presence rule and the ongoing fight between states and retailers regarding the collection of use tax on online sales. This could be one of the most significant state tax cases heard by the Supreme Court in decades. Unfortunately, it is fighting for press against federal tax reform. Bad timing.

I’ve blogged about this dispute before, so I don’t want to rehash all of the history of Quill and the issues related to collecting use taxes on online commerce. However, both the Petition for Writ of Certiorari and the Respondents’ Brief in Opposition have now been filed (the Petition was filed by the State of South Dakota on October 2nd and the Respondents’ Brief in Opposition was filed last Thursday), so I thought that it might be helpful to summarize the major arguments made by both sides in their filings and to foreshadow some of the arguments to come. (Warning, this gets long even as a summary…)

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Giving Tuesday and State Use Taxes

By Adam Thimmesch

For a few years now, I’ve gently pushed the idea of Use Tax Tuesday to follow Cyber Monday. Why not follow one of the biggest tax-avoidance days of the year with a day dedicated to undoing that damage? As much as this makes sense to me, it appears that I have lost out to Giving Tuesday, and probably rightfully so.  Nevertheless, I want to suggest that Use Tax Tuesday can easily be folded within the more general ambit of Giving Tuesday. Maybe all is not lost.

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The Distortive Effects of Partially Repealing the SALT Deduction

By Adam Thimmesch

The treatment of the state and local tax deduction under the GOP’s tax bill has gotten a lot of attention since the bill’s roll out last week. All else being equal, the proposed changes would disproportionately impact high-income taxpayers in blue states, and that issue is front and center in discussions about the bill. The TCJA is also noteworthy, however, in that it does not propose completely eliminating the SALT deduction as had been previously discussed. Instead, it contains a partial repeal for some taxpayers. That creates some noteworthy distortions that might escape the attention of the average person following these discussions.

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Tax Surveillance and Tax Design

By Adam Thimmesch

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Late last week, I ran across an article from the UK (thanks tax Twitter!) regarding a significant uptick in the number of vehicles being “clamped” or impounded in the UK due to a failure of their owners to pay a required road tax. The story wouldn’t have really captured my attention, but for its inclusion of a quote from the Driver and Vehicle License Agency’s National Wheelclamping Manager. In response to the release of information about increased noncompliance with the tax, the DVLA posted a warning on its website: “Our enforcement teams are out and about on the roads around the UK all year. Their vans are equipped with number plate recognition cameras so any vehicle that isn’t taxed is at risk of being clamped or impounded.” As someone who has spent a lot of time thinking about tax privacy lately, this was intriguing, so I did some digging.

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Winning by Losing? Getting the Supreme Court to review Quill.

By Adam Thimmesch

The Supreme Court of South Dakota heard sdsc_1_smalloral arguments in South Dakota v. Wayfair, Inc. earlier this week. That case involves a challenge to a South Dakota statute that requires vendors to collect the state’s use tax based solely on their economic connections with the state—a requirement that seems to directly contradict the rule embraced by the Supreme Court in Quill Corporation v. North Dakota. What was unusual about the case is that the state argued that it should lose. You don’t run into that every day.

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