Confronting Wayfair's Unanswered Questions - PYMNTS.com
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OC TO B E R 2019 FEATURE STORY – PAGE 8 Confronting Wayfair’s Unanswered Questions NEWS AND TRENDS – PAGE 12 South Carolina Supreme Court rules Amazon owes millions in unpaid taxes DEEP DIVE – PAGE 17 How online retailers are continuing to adjust to a post-Wayfair U.S.
4 What’s Inside States and cities are exploring the online sales taxes they can impose, but some retailers are fighting back 8 Feature Story Rachelle Bernstein, vice president of government relations and tax counsel for the National Retail Federation, discusses the confusion over marketplace facilitator law compliance and current policy refinement efforts 12 News & Trends Recent headlines from the next-gen sales tax space, including the South Carolina Supreme Court’s ruling that Amazon owes millions in unpaid marketplace facilitator taxes and a legal challenge made to Kansas’s safe harbor-free economic nexus law 17 Deep Dive An in-depth examination of how businesses are adjusting to a post-Wayfair tax landscape and how economic nexus policies are developing 20 About Information on PYMNTS.com and Avalara ACKNOWLEDGMENT The Next-Gen Sales Tax Tracker® is powered by Avalara, and PYMNTS is grateful for the company’s support and insight. PYMNTS.com retains full editorial control over the following findings, methodology and data analysis.
W H AT ’ S I N S I D E
The 2018 South Dakota v. Wayfair case opened the Court recently heard arguments over whether online
floodgates for states and individual cities to launch tax travel companies that offer hotel booking, like Priceline
policies aimed at remote sellers and marketplaces, and and Orbitz, can be taxed as hotel operators. Even
these regulations extend beyond simple sales taxes. pre-Wayfair eCommerce regulations are facing new
Pennsylvania is arguing that the ruling enables it to tax questions, as software-as-a-service (SaaS) retailer Citrix
remote sellers for the net corporate income they make recently challenged Massachusetts’ application of the
through selling to the state’s residents and storing as- state’s 2017 online tax law. The provider claimed the law
sets there, for example. Jurisdictions are continuing to should either not apply to its subscription sales or the
explore the full scope of the Supreme Court ruling and state should also tax Google and Uber when residents
how online commerce taxation can look, including tax use the companies’ softwares.
types and affected businesses.
The U.S. online tax space is constantly evolving as mu-
Not all sellers are pleased with this development, how- nicipalities roll out new policies and investigate the full
ever, and some have pushed back. Arizona’s Supreme scope of existing laws.
4 | © 2019 PYMNTS.com All Rights Reserved
W H A T ’ S I N S I D E
Around the next-gen sales tax world The push to revise eCommerce sales tax laws for
marketplaces
Retailers have argued against online sales tax applica-
tions in Massachusetts and other states, but this fight The recent South Dakota v. Wayfair decision has enabled
is coming from within the government in Kansas, where states and cities to unveil legislation requiring eCom-
the state’s attorney general (AG) recently stated that the merce marketplaces to collect and remit sales taxes on
Department of Revenue’s (DOR’s) economic nexus law the third-party transactions they support. Businesses
is invalid. The regulation fails to exempt even small re- and governmental stakeholders have been given some
mote businesses with very little activity in the state, and time to observe such marketplace facilitator laws in
this lack of exemptions runs counter to the Wayfair rul- action, and many are pushing for policy refinements.
ing, according to the AG. Demand is growing for states and cities to make more
unified policies, clearly define marketplace facilitators
Kansas is concerning itself with small retailers, but an-
and empower sellers to collect such taxes themselves.
other state is focusing on taking a giant to task. The
South Carolina DOR recently filed a suit that claims For this month’s Feature Story (p. 8), National Retail
Amazon owes back taxes for remote sales its market- Federation vice president of government relations and
place facilitated, and the court ruled in favor of the DOR. tax counsel Rachelle Bernstein explains the state of
Amazon could have to pay for more than three years of marketplace facilitator laws and ongoing policy revision
sales under the ruling. proposals.
Another major online marketplace is finding a sweeter DEEP DIVE: The complex, ongoing and unexpected
reception in California, where the city of San Jose re- effects of the Wayfair case on retailers
cently offered eBay a revenue sharing deal that would Sellers dedicated to minimizing tax exposure before
enrich both entities at the expense of other in-state mu- the Wayfair ruling only had to worry about their physi-
nicipalities. The 15-year agreement enables eBay to cal presences, choosing to operate in states with low tax
pretend that all Californian online sales over its platform rates and carefully curtailing activities to avoid qualify-
were with residents of San Jose, regardless of buyers’ ing in other states.
actual locations, netting San Jose a hefty amount of tax
All that has changed after the Wayfair case. Remote
revenue that would otherwise go elsewhere. The city will
sellers are working to determine where and how new
give eBay a cut of the platform’s own taxes in exchange,
tax laws obligate them to not only pay new sales tax-
preventing the company from having to handle the ad-
es but also others such as income and franchise taxes.
ministrative work of navigating tax policies and rates.
Retailers need to perform careful research to under-
For more on these stories and other headlines from stand their obligations and minimize the risk of penalties.
around the next-gen sales tax space, visit the Tracker’s This month’s Deep Dive (p. 17) investigates the ways that
News and Trends section (p. 12). remote retailers around the world are adjusting to the
United States’ evolving online tax landscape.
© 2019 PYMNTS.com All Rights Reserved | 5
W H A T ’ S I N S I D E
EXECUTIVE
Insight
The South Carolina Supreme Court recently ruled that Amazon owes back
taxes from its digital sales dating back to 2016. What does this ruling mean for
eCommerce marketplaces, and how can they best strategize to meet their new
tax obligations?
“The South Carolina Supreme Court’s decision to have Amazon pay back taxes on the
sales of tangible goods by third-party marketplace sellers signals a slippery slope in new
potential tax obligations for eCommerce marketplaces with nexus in the states that have
not yet enacted marketplace facilitator laws.
Following South Carolina’s decision, the remaining states that have yet to enact mar-
ketplace facilitator laws could potentially base their cases for collecting unpaid taxes
on the breadth of services marketplaces offer. For example, most marketplaces man-
age some aspect of the marketing, transaction fulfillment, customer service and returns
for the goods that third-parties are selling. The only thing many are not currently doing is
managing the tax liability.
It will be important for marketplaces to be clear on the entire scope of services they pro-
vide — including sales tax collection and remittance — so that they can be prepared if and
when these remaining states come seeking uncollected sales tax revenue.”
G R EG CH A PM A N
senior vice president of business development, Avalara
W H A T ’ S I N S I D E
$12.5M $10.5M
Amount of Amazon’s Amount that San Jose,
unpaid eCommerce California, will pay eBay
taxes sought by South under the first year of
Carolina’s Department of their digital sales tax
Revenue revenue sharing deal
11 $500K
Number of Arizona cities Minimum gross
that aim to tax online receipts an out-of-state
travel companies for hotel business must make
brokerage services in Pennsylvania before
being subjected to its
new net income tax
80% FIVE
FAST
Portion by which
Indonesia’s online retail
market grew in 2018
FACTS
F E AT U R E S T O R Y
Feature Story
Confronting Wayfair’s Unanswered Questions
The 2018 South Dakota v. Wayfair ruling paved the way Stakeholders such as NRF wish to refine marketplace
for broadened U.S. tax laws, and some businesses and facilitator laws and urge greater clarity following the
public sector stakeholders are now pushing back. The Wayfair decision. The negotiation process may not be
case ushered in a wave of state- and municipality-issued easy because proposals to change state and local tax
economic nexus laws that tax remote sellers based on laws must balance retailers’ hopes for unified standards
economic activity rather than physical presences. The that simplify selling across different jurisdictions with
ruling also permitted marketplace facilitator laws that states’ and municipalities’ desires to fully control their
obligate eCommerce businesses to collect and remit tax policies.
taxes for sales made on their platforms. The Wayfair
decision did not answer questions about these laws’ The case for refining marketplace facilitator laws
specifics, however, prompting stakeholders to make rec- eCommerce marketplaces must wrestle with ample
ommendations so businesses can comply more easily. tax compliance challenges as state and city policies of-
ten vary regarding the product types subject to taxes.
Marketplace facilitator laws have been particularly
Companies may also struggle to determine whether a
murky, as many are written in broad terms that have
particular state considers them to be marketplaces.
complicated compliance for eCommerce platforms,
according to Rachelle Bernstein, vice president of gov- “Some definitions of marketplace facilitator are so broad
ernment relations and tax counsel for the National Retail … that you’d have some problems determining who it is
Federation (NRF), a Washington, D.C.-based organiza- that’s supposed to be collecting the tax,” Bernstein said.
tion representing sellers from more than 45 countries. Some policies define a marketplace as any
NRF filed several friend-of-the-court briefs during the platform-owning entity that lists purchasable items,
Wayfair case. even if it does not handle those items’ payments and
© 2019 PYMNTS.com All Rights Reserved | 9F E A T U R E S T O R Y
cannot see into the transactions. Websites display- or in part, bringing more commonality to state policies,
ing clickable advertisements that redirect to merchant Bernstein said.
sites would get treated as marketplace facilitators un-
der some state laws, even though the transactions Weighing more flexible responsibility
are completed elsewhere, Bernstein said. This can be This is not the only marketplace facilitator law ad-
problematic because they lack easy access to the trans- justment under debate. Stakeholders are weighing
action details necessary for applying local tax rules. another major policy adjustment: giving remote sell-
ers the option of collecting taxes for their sales through
“An advertising platform that doesn’t even know if the
marketplaces rather than requiring the latter to always
sale was consummated and doesn’t know where the
bear responsibility.
product is being sold ... could potentially be considered
a facilitator,” she explained. Merchants might support this measure if states are
underwhelmed with their marketplace tax collections.
States have long debated how to write these definitions.
They know states may turn to sellers to correct such
A November 2018 draft white paper from the Multistate
shortfalls, and not knowing marketplaces’ actions could
Tax Commission (MTC) noted that some states’ policies
leave merchants struggling to clarify their situations,
specify that an entity must handle related payments and
Bernstein explained. It would thus not be an additional
have access to certain transaction details to be consid-
burden for sellers that collected taxes in these states
ered a marketplace, as well as qualifications that ensure
prior to marketplace facilitator laws to continue to han-
the marketplace has the capability to collect and re-
dle that collection.
port taxes.
Other states are instead instead future proofing their The path to change
laws with far-reaching definitions intended to remain Businesses desire more uniform marketplace facilitator
relevant as industries change. They designed broad- laws because they simplify compliance work, but legisla-
ly written legislation to block marketplaces from tors with more mixed priorities may not prize uniformity
gaming the system and narrowly falling outside the as strongly, Bernstein said. The U.S. Congress is unlikely
rules. Bernstein noted that the expansive definitions to move quickly on the issue, which leaves the future of
could be accidental in some cases due to lack of aware- tax simplification with states and cities for now. A num-
ness about the full ramifications. ber of local governments have so far been reluctant to
Various organizations are now advocating for simpler relinquish any control of their particular tax policies to
marketplace facilitator laws, including the MTC, which follow others’ leads or adopt cross-state agreements.
is continuing to recommend refinements. The National “It’s always difficult for legislators to want to give up that
Council of State Legislators designated a task force to authority,” she explained.
develop model legislation that states can adopt in whole
10 | © 2019 PYMNTS.com All Rights ReservedF E A T U R E S T O R Y
This individuality is not evident across the board, though, Many states are open to tax policy improvements and
as 24 states currently abide by the Streamlined Sales working toward simpler, streamlined regulations now
and Use Tax Agreement (SSUTA), a promise to unify tax that they are seeing their laws in action, Bernstein noted.
environments across intrastate localities, enable sell- Marketplace facilitators may be shouldering new com-
er registration via one application and define common pliance burdens after the Wayfair ruling, but they may
product categories. The latter provision is aimed at pre- also find many policymakers ready to help.
venting issues in which some states count unsweetened
carbonated water as a taxable “soft drink” and oth-
ers do not.
UNDER THE Hood
Has economic nexus law compliance been a struggle for remote sellers?
“What I’m hearing is that compliance has not been diffi- new laws] has not been difficult and has not changed
cult. The very largest retailers probably have presences their ability to sell [to customers wherever]. … They are
in virtually every state and have been collecting in vir- now very comfortable with these changes.
tually every state even before [the Wayfair ruling]. The
I’ve also talked to smaller sellers that sell a lot through
compliance is not necessarily a change for them. ...
their own websites directly and so needed to engage
They probably already have software services they’ve
software providers to add the additional services [for
been using to deal with [tax collection] in multiple
tax compliance]. They’ve told me that the process was
states and ... it wasn’t very difficult to add collection in
not bad and that the costs were not prohibitive, and
additional states. Regional retailers with presences in
that, clearly, they’re making more money from being
one area of the country that may have been selling into
able to have these sales into other states than it is cost-
other areas, and small retailers that may be only in one
ing them. Before [the laws were enacted] I had heard
or two states and have websites for selling into other
some retailers say, ‘If I don’t have that many sales into
states obviously face a change. … At this point, I think
a particular state and it’ll cost me so much money to
smaller sellers have become comfortable with [the eco-
sell there, I’ll say on my website that I’m not selling in
nomic nexus laws].
that state.’ Nobody ended up being in that situation, be-
I’ve talked to sellers that primarily sell over market- cause it’s not the way these things are priced. … Various
places. The marketplaces collect tax for them and ... sellers have been able to find the resources they
that makes it easy. These are sellers who were worried need to deal with the new laws.”
about what would end up happening, but [coping with
R ACHELLE BERNSTEIN
vice president of government relations and tax
counsel, National Retail Federation
© 2019 PYMNTS.com All Rights Reserved | 11NEWS & TRE NDS
Defining the scope of sales of “tangible personal property” and that the specif-
ic software in question — Citrix’s GoToAssist, GoToMyPC
digital commerce taxes and GoToMeeting products — do not count because the
Citrix fights Massachusetts DOR in Supreme Court company provided only temporary access via subscrip-
over SaaS sales tax tions. Citrix asserted that if the DOR does go forward
A tax dispute in which Florida-based SaaS seller Citrix is with taxing this use case, companies like Uber and
going head-to-head with the Massachusetts Department Google should also pay.
of Revenue (DOR) is working its way through the state’s
This is not the first time Citrix has sought to have a DOR’s
highest court. The DOR has demanded that Citrix pay
tax payment request dismissed. The company brought
what it asserts are overdue taxes from the sales of
other sales tax demands before the state Appellate
three software products during April 30, 2007, to June
Board in 2018, which ruled in favor of the DOR. This
30, 2009, and Oct. 31, 2009, to Dec. 31, 2011. The dis-
most recent case went before the state Supreme Court
pute regards whether Citrix’s sales are taxable under
on October 4. Citrix employs approximately 8,200 work-
Massachusetts’ cookie nexus law, which recognizes
ers and took in more than $2.9 billion in revenue in 2018.
companies as having physical presences if they store
cookies on computers or smartphones located within
the state. Citrix is arguing that this policy only applies to
12 | © 2019 PYMNTS.com All Rights ReservedN E W S & T R E N D S
Arizona Supreme Court ruling taxes hotel and the levy applies to money made in state from selling,
brokerage sites renting, leasing or licensing tangible personal proper-
Arizona’s Supreme Court recently ruled on its own tax ty; selling services; and selling or licensing intangibles,
quandary, in which 11 cities sought to tax online travel like franchise agreements. Companies that do business
companies on revenue from facilitating hotel bookings. in Pennsylvania, own property there, conduct activities
The cities charged that these companies were essential- — except certain excluded types of solicitation — or use
ly operating hotels and should be taxed as such – and capital or property owned there qualify for the tax.
the court agreed. Justice John Lopez wrote in favor of
the opinion, stating that broker sites like Orbitz, Priceline
and Travelocity perform activities that are central to
Online marketplaces
keeping hotels in business, noting the sites “advertise eBay informs online sellers of mandatory new tax
collection procedures
available rooms, solicit potential customers, collect
customers’ information, process payments, confirm Major online marketplace eBay started collecting sales
reservations, provide customer service, and facilitate tax for its merchants in 11 states on Oct. 1. The mar-
reservation modifications and cancellations.” Justice ketplace warned its sellers in advance that they would
Ann Scott Timmer objected to the ruling on the grounds not be able to opt out of automatic sales tax collec-
that it too broadly defined hotel operation, asserting that tion or prevent their items from being sold in affected
travel sites do not perform various critical functions states, asserting that its policies address legal require-
such as managing or deciding where to locate hotels. ments and that similar laws will likely be put in place in
more states in the future. The marketplace now collects
While the court’s ruling supported the cities’ claims, it
and remits sales tax on eligible transactions in Arizona,
only allowed the municipalities to collect unpaid tax for
California, Colorado, Maine, Maryland, Massachusetts,
revenue on transactions dating from 2013 rather than the
Nevada, North Dakota, South Carolina, Texas and Utah
cities’ request to bill from as far back as 2001. Apache
as well as several other states.
Junction, Chandler, Flagstaff, Glendale, Mesa, Nogales,
Phoenix, Prescott, Scottsdale, Tempe and Tucson were South Carolina court rules Amazon must pay
the involved Arizonan cities. marketplace facilitator back taxes
Amazon is also slated to be inundated with new taxes,
Pennsylvania seeks to tax remote sellers’
despite having frequently earned exemptions by prom-
corporate net income
ising states investments or local job creation. South
Pennsylvania is also testing online sales tax boundar-
Carolina appears to simply want the cash, pursuing
ies, as the commonwealth’s DOR asserts the Wayfair
what its DOR claims are unpaid taxes owed on sales
ruling enables it to require out-of-state businesses to
Amazon facilitated from out-of-state merchants. Judge
file taxes on the net corporate income they make with-
Ralph Anderson III issued a September court ruling in
in the state. It plans to only tax businesses meeting or
which he agreed that responsibility for those taxes falls
exceeding $500,000 of direct or indirect gross receipts,
© 2019 PYMNTS.com All Rights Reserved | 13N E W S & T R E N D S
on Amazon. The DOR initially requested $12.5 million undue advantages over local businesses by not collect-
in taxes, interest and penalties for Q1 2016, but a DOR ing sales tax.
spokesperson says the online marketplace could be on
the hook for 13 quarters-worth. eBay signs deal to divert digital sales tax revenue
to San Jose
Amazon expressed concern over the potential ruling
Major marketplace eBay is coping with new digital
during a July quarterly report, fearing that the ruling
sales taxes by cutting a deal reminiscent of a kickback
could set a precedent and that “if South Carolina or other
scheme with the city of San Jose, California. The ar-
states were successfully to seek additional adjustments
rangement calls for eBay to pretend that all Californian
of a similar nature, [the company] could be subject to
purchases made over its platform were with residents of
significant additional tax liabilities.” Amazon prom-
San Jose, enabling eBay to simplify its tax compliance
ised to “vigorously” oppose South Carolina’s efforts.
by only following San Jose’s policies and giving the city
Washington-based think tank Tax Foundation concurred
a revenue bump by diverting sales tax funds from other
with Amazon after the ruling, stating that it believes ret-
municipalities to itself. San Jose sweetened the deal by
roactive tax collection was “unconstitutional,” while the
offering direct financial incentives: After the city collects
ruling’s defenders said the eCommerce giant received
14 | © 2019 PYMNTS.com All Rights ReservedN E W S & T R E N D S
$5 million in sales taxes from eBay, it will let the compa- new laws slows. Merchants would use their own web-
ny keep 30 percent of any additional tax revenue. San sites’ stores only to redirect customers to marketplaces
Jose officials expect the first year of the 15-year agree- where customers can then complete transactions.
ment to bring in $40 million net taxes, providing the city
“These eCommerce platforms can make tax simple and
with $29.5 million — compared to just $5 million without
have it built in and have an easy ‘click and submit’ pro-
the deal — and eBay with up to $10.5 million.
cess,” Chapman said.
eBay, which was founded in San Jose, was required to
start handling digital sales taxes on Californian trans-
actions on Oct. 1. This is not the first city-business tax
New remote seller tax
revenue sharing deal in the state, and Governor Gavin laws
Newsom has several more months to sign bills that Alabama enforces its economic nexus law
would ban this kind of profit-sharing deal and permit Alabama’s economic nexus law predates the 2018
city-corporate incentive agreements provided that the Wayfair ruling, but it is just now going into effect. The
deals are transparent. state’s DOR issued a requirement in 2015 that remote
sellers making more than $250,000 in sales annually
Why selling through a marketplace does not fully
ease SMBs’ tax frictions would have to register and collect taxes on those trans-
actions by Jan. 1, 2016. Alabama officials were aware
Marketplaces may become increasingly important to
that the law flew in the face of an existing Supreme
SMBs as the latter struggle to cope with eCommerce
Court ruling and had intended to fight any challenges in
sales tax laws, Avalara’s senior vice president of busi-
court until Wayfair handled that fight for them. Alabama
ness development, Greg Chapman, said in a recent
held off on enforcing the law until the Wayfair ruling “re-
PYMNTS interview. SMBs may have as few as 10 employ-
moved the constituent impediments” to doing so, the
ees, making it difficult to spare anyone to help navigate
Alabama DOR said in a public notice. The state began
new tax obligations. Businesses that sell across many
implementing the policy for large sellers only in October
states may therefore inadvertently fall afoul of tax laws
2018, while marketplace facilitators had to comply by
if they cannot keep straight which states exempt them,
January 2019.
which require them to remit and which place tax collec-
tion responsibilities on marketplaces. Officials advised marketplaces and sellers to participate
in the Simplified Sellers Use Tax (SSUT) program, which
More than 30 states presently have marketplace facilita-
enables remote businesses to pay a flat sales tax rate
tor laws, which remove SMBs’ collection burden but keep
regardless of municipality. Alabama promised sellers
them responsible for knowing where and when they can
that joined SSUT by Oct. 1 an amnesty for non-collected
rely on platforms for tax collection. Chapman said he ex-
taxes so long as they began collecting taxes following
pects that SMBs may find it easier to rely on third-party
registration. SSUT participants are required to stay in
marketplaces to handle tax complexities once more
the program for three years.
states have established their policies and the rollout of
© 2019 PYMNTS.com All Rights Reserved | 15N E W S & T R E N D S
Florida considers digital sales tax law written by because it included no such safe-harbor provision for
retailer lobbyists SMBs and was thus “inconsistent with Wayfair.”
Florida is currently one of only two states with statewide
sales tax laws, yet no economic nexus policy. Its leg-
islature is currently considering changing that with SB
International online tax
126, a new bill that the Orlando Sentinel says is primarily developments
written or approved by major retail lobbyists from com- Indonesia drafts digital sales tax policy
panies such as Amazon and Uber. A lobbyist from the Indonesian eCommerce companies could face new on-
Florida Retail Federation emailed the bill to the chair of line sales taxes as well, as the country’s government
the Florida Republican Party, state Senator Joe Gruters, is working to get a bigger cut of the overseas transac-
who later filed it nearly word-for-word. The lobbyist said tions that fueled an 80 percent growth in its online retail
in the email that the legislation was “reviewed and ap- market last year. Its bill would require both remote and
proved by the interested member group.” Identities domestic eCommerce companies to collect and pay
of these members have not been disclosed, but the value-added taxes (VATs) and is expected to go into
Orlando Sentinel noted that major retailers including effect next year. Robert Pakpahan, tax director gener-
Best Buy, Target and Walmart have pushed for online al at the Finance Ministry, anticipates the forthcoming
sales tax policies — presumably to even the playing field law will not burden companies because they could pass
against online competition — while others speculate that costs on to their customers. Google has already an-
companies like Amazon seek to have clear eCommerce nounced that it will collect a 10 percent VAT on Google
tax laws established to avoid responsibility for back tax- Ad accounts with Indonesian billing addresses next year.
es. This is Gruters’ second attempt to pass such a bill.
EU to launch bloc-wide digital services tax if no
Kansas AG rejects DOR’s threshold-free economic global one emerges
nexus law
The European Union is also eager to enact online taxes,
Kansas is also looking to introduce a new digital sales with its commissioner-designate for economic affairs,
tax, but has run into hurdles as its DOR’s economic Paolo Gentiloni, recently stating that Europe will not
nexus law, which was slated to go into effect on Oct. 1, wait for a global accord before implementing a digital
ran afoul of its attorney general. The state passed an services tax. Gentiloni aims to explore the viability of a
eCommerce sales tax law in August that required online “web tax” with wide international deployment that cov-
sellers to pay taxes for even one sale of any value, which ers the members of the G20 or of the Organisation for
breaks many states’ post-Wayfair economic nexus laws’ Economic Co-operation and Development (OECD). The
choices to include exemption thresholds around sales’ EU will propose a European version should no worldwide
dollar valuea or transaction quantities. Kansas’ AG re- accord be reached by 2020.
cently determined that the DOR’s law should be invalid
16 | © 2019 PYMNTS.com All Rights ReservedDEEP DIVE
Wayfair’s Complex, Ongoing And Unexpected
Effects On Retailers
The 2018 South Dakota v. Wayfair ruling is reshaping the amended marketplace facilitator laws, and even more
business landscape, forcing companies to consider its states are slated to implement remote seller tax laws in
long-term effects. Wayfair’s case enabled cities and the next few years.
states to pass economic nexus laws that require out-of-
American businesses had more tax minimizing op-
state sellers to collect and remit taxes on local residents’
tions prior to the ruling, as retailers selling all across the
sales, and it permitted these jurisdictions to implement
country were taxed on their physical presences. States’
marketplace facilitator laws necessitating that eCom-
definitions vary, so companies could formerly reduce
merce platforms collect and remit taxes on third-party
their exposures by basing their operations in locations
merchants’ sales.
with minimal tax rates and avoiding activities in other
As of Sept. 23, 43 states had adopted economic nexus states that would trigger those jurisdictions’ particu-
laws, and five more states began enforcing such pol- lar definitions of what counts as a “physical presence.”
icies on Oct. 1. An additional 12 states have added or That might mean not hiring contractors or employees in
© 2019 PYMNTS.com All Rights Reserved | 17D E E P D I V E
some states or declining to attend trade shows, open Unexpected tax obligations
storefronts and store inventory in others. Sellers that respond to economic nexus laws by reg-
New remote seller laws hinder sales tax avoidance, and istering with DORs may discover they owe more taxes
states are using the Wayfair ruling to apply additional than expected because those that thought they were
tax forms to these sellers. Businesses must therefore re- only remote sellers may legally qualify as having phys-
adjust to comply and avoid penalties in this new world of ical presences. Arizona regards businesses as having
ongoing tax policy changes. physical presences if they store product inventory there
— such as products held in fulfillment centers owned and
More than sales taxes operated by Amazon — or if representatives are pres-
Economic nexus and market facilitator laws have ent in the state for more than two days each year. Texas’
pushed sellers to learn how individual states tax dis- “physical presence” definition could obligate businesses
crete product categories. Some do not tax groceries or that take orders or sales during an in-state convention or
clothing, for example, while others tax groceries at lower trade show to file taxes, even if a business only attended
rates or only tax clothing if prices exceed certain thresh- a single, one-day event in a given year.
olds, in the way that New York taxes only clothes priced
Accounting specialists recommend that businesses
at $110 or more.
carefully research any unpaid tax obligations before reg-
Those are not the only new taxes facing remote sellers, istering with the local DOR so that they can use states’
and the Wayfair ruling may force businesses to reas- voluntary disclosure programs. States may choose to
sess far more than just their digital sales. The Supreme forgive fees and interest for businesses that make vol-
Court decision also appears to enable states to require untary disclosures rather than simply wait and see if
businesses to file income taxes for revenue shares the states find out about their outstanding obligations.
generated there. The Massachusetts legislature has Businesses interested in mergers must also address un-
proposed a regulation that would obligate remote sellers paid back taxes or risk them complicating and delaying
above a certain sales volume to file, and Pennsylvania agreement closings.
has already issued a similar demand. Merchants in San
Merchants may struggle with the new tax landscape, as
Francisco that surpass a certain threshold of gross re-
a recent survey of technology companies’ chief financial
ceipts will face mandatory payroll expense taxes, and
officers found that 68 percent expressed high or mod-
Texas is among the states to hit remote sellers with a
erate worry regarding tax changes in 2019 and that 10
franchise tax. Businesses therefore must pay attention
percent of that worry stems from the Wayfair ruling.
to sales tax rates where they sell, as well as all kinds of
Many uncertain businesses have not taken proactive
local tax rates.
steps, waiting to act until tax authorities contact them
over their obligations — a problematic approach.
18 | © 2019 PYMNTS.com All Rights ReservedInternational sellers Many online sellers worldwide were — and continue to
U.S.-based entities are not the only ones reconsidering be — surprised by the South Dakota v. Wayfair ruling’s
responsibilities and strategies after the Wayfair ruling. impacts. Businesses face new obligations not only
International sellers without permanent American phys- for sales taxes but also income taxes, franchise taxes
ical presences that reach U.S. consumers online are and more. Marketplaces have not finished adjusting to
typically exempt from federal taxes, but they must com- Wayfair, either, as changes continue to roll out.
ply with localities’ new sales and use tax laws. These Arizona, for example, is phasing down its SMB exemp-
transactions make up a significant space, as 40 percent tion threshold to only affect those selling less than
of Amazon’s top sellers are based in China — a figure $100,000 in 2021. Florida — one of only two states with
that rose from 26 percent in 2017. sales taxes but no remote seller tax policies — is con-
Tax advisors have had to explain this new environment sidering a bill that would introduce economic nexus and
to their overseas clients and reports suggest that there marketplace facilitator policies. Businesses are careful-
have not been significant issues with overseas retailer ly studying their changing tax obligations as states and
noncompliance despite some initial confusion and reluc- cities continue to explore the possibilities the Wayfair
tance. Large European eTailers, for instance, are used to ruling has unleashed.
coping with the EU’s somewhat comparable VATs and so
appear to be adjusting more readily.
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