Five Years of Wayfair: Continuing Complexity

Scott Peterson of Avalara discusses the South Dakota v. Wayfair decision, including how companies and states are faring five years later and what could be next with sales tax nexus.

For additional coverage, read these articles in Tax Notes:

• Quad Graphics Urges Supreme Court to Take Up Sales Tax Appeal
• South Dakota’s Deb Peters Discusses Wayfair Five Years Later
• No Need to Hear Sales Tax Dispute, North Carolina Tells SCOTUS
• Halstead Bead Asks Fifth Circuit for Relief From Louisiana's Tax System
• North Carolina Institute Urges SCOTUS to Hear Sales Tax Dispute
• Arizona Lawmakers Consider Sales Tax Simplification Bill
• Panelists: Post-Wayfair Nexus Thresholds, Retroactive Application Still Unresolved

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Credits
Host: David D. Stewart
Executive Producers: Jasper B. Smith, Paige Jones
Showrunner and Audio Engineer: Jordan Parrish
Guest Relations: Alexis Hart

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David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: This is the Wayfair anniversary.

This month marks five years since the landmark decision in South Dakota v. Wayfair. The ruling drastically changed the state tax landscape and affected countless companies operating across state lines.

So how have businesses and states fared in the last five years, and could this ruling be further expanded in the future?

Joining me now to talk more about this is Tax Notes senior legal reporter Andrea Muse.

Andrea, welcome back to the podcast.

Andrea Muse: Hi, Dave. Good to be back.

David D. Stewart: Could you start us off by giving us a refresher on the Wayfair decision?

Andrea Muse: Sure. So before Wayfair, states could not require businesses without physical presence in the state to collect and remit their sales taxes, based on a 1992 U.S. Supreme Court [decision], Quill Corp. v. North Dakota, and another U.S. Supreme Court precedent.

In an effort to get the U.S. Supreme Court to revisit the physical presence standard, South Dakota enacted a law requiring remote sellers with more than a $100,000 in sales in the state or 200 transactions to collect the state sales tax. The U.S. Supreme Court took up the case, and in a 5-4decision overruled Quill and the other case, National Bellas Hess, setting the stage for states to require remote sellers to collect their tax.

The majority [opinion] written by Justice Anthony Kennedy approvingly noted features of the South Dakota law, including the threshold that it was not retroactive and that South Dakota was a party to the streamlined sales and use tax agreement. Chief Justice Roberts authored the dissent, which argued that the issue should be left to Congress.

David D. Stewart: All right. Now, I understand you recently talked with somebody about this. Could you tell us about your guest?

Andrea Muse: Scott Peterson is the vice president of U.S. tax policy and government relations for Avalara Inc. Prior to joining Avalara, Scott was first a director of South Dakota sales tax division and then became the first executive director of the Streamlined Sales Tax Governing Board.

David D. Stewart: And what sort of issues did he get into?

Andrea Muse: He talked about the history of Wayfair and the states' attempts at requiring remote sales taxation, the challenges businesses have faced after Wayfair, and what challenges they may face in the future.

David D. Stewart: All right. Let's go to that interview.

Andrea Muse: Hi, Scott. Thank you so much for being willing to speak with me about Wayfair.

Scott Peterson: Well, thank you, Andrea. It's my pleasure.

Andrea Muse: I thought the first thing we should probably start with is how we got to Wayfair and what was the history of sales tax in the states before Wayfair came out in 2018?

Scott Peterson: Before Wayfair, the states have been trying since almost the beginning of the sales tax to find a way of dealing with what's an obvious flaw in a sales tax, which is, "If I don't live in your state, I'm not going to collect your tax." And so Mississippi started the sales tax in 1929, and a bunch of states followed thereafter in the early 1930s. Almost immediately after Mississippi created a sales tax, the rest of the states realized there was a problem.

And so they all created a thing called a use tax. A use tax is a tax that's imposed upon you and me as consumers that we are supposed to pay when we buy something from a retailer that doesn't have a legal obligation to collect the sales tax. That's the way the world went, frankly, up until Wayfair.

The states, after they created their sales tax, created their use tax, which they then realized has an obvious hole in it. They don't have a clue who's buying things. And so for all those years that the states had this use tax in place, they had to find a way to understand what you and I as consumers were buying and then make a distinction between what were you buying from downtown merchants where they're collecting the sales tax and out-of-state merchants where they weren't collecting the sales tax.

Andrea Muse: What options did states look at to do this?

Scott Peterson: So unfortunately, there were three approaches. First you audit people: You go out there and you look for people who are making sales that aren't collecting the sales tax, but you think you can make them collect a sales tax, and if not, you get their list of customers. A very heavy-handed, not erratic, but too focused way of collecting the use tax.

The second is that you put a line in your income tax form and you do education and you remind people that the state has more taxes than just its income tax. And that if you're making purchases from people outside the state and they aren't charging the sales tax that you legally owe the use tax, "Here's a line on the income tax where you can report that."

The third approach was like the first approach, how do I get information about purchases? OK, I get it. You have to collect tax. We went to court with you twice. We went to court with you in 1967 in National Bellas Hess v. Illinois. We went to court again with you in 1992 in Quill v. North Dakota. The Supreme Court in both those cases said that there is more that must be done by a retailer before the state has a right to make them collect the tax.

So the state said, "OK, how do I get this information if I have no idea who purchased what from whom? I need to know where that came from." There were only two people that have any idea whatsoever about a transaction, and that's the buyer and seller.

What the states did — and this was kind of, I think many people in both the public sector and the private sector thought this was just a crazy idea — but it started in the state of Colorado. State of Colorado introduced legislation that said that "we're happy to collect the use tax, but you have to help us," and you in this case would be retailers.

So what Colorado did was enact a law that gave retailers two choices: Tell us who your buyers are and how much they purchased from you, or collect the tax. And this obviously immediately went to court and it was in court for years, went back and forth between state court and federal court, until finally it got to a spot where it was an issue of the Federal Tax Injunction Act.

It got to the Supreme Court, and the Supreme Court said that it wasn't an undue burden to make retailers tell the state about their customers. In that case, one of the justices said, "This case is an example of the mistake that the Supreme Court made in National Bellas Hess in 1967 in creating this bright line around which retailers have to collect which state sales tax and the bright line was physical presence."

And in '67, Supreme Court said that National Bellas Hess couldn't be required to collect the Illinois use tax because National Bellas Hess didn't have sufficient connection — nexus — with Illinois. And without that nexus, the state wasn't entitled to make them do something for them. Well, what the Supreme Court said in Brohl v. DMA [was] that it's time for the bar to bring another case around physical presence, around Bellas Hess, back to the Supreme Court because they needed another chance to consider it.

Whereas the states had never imagined that. When the states lost the court case in 1992, they immediately started negotiating. A project was created for state tax administrators to talk to the business community to find out what it would take in the way of changing the state sales tax system so that retailers would actually volunteer to collect sales tax.

Andrea Muse: And that was the streamlined project?

Scott Peterson: No, this actually preceded streamlined. States lost Quill in 1992, and by 1994 there was a group of state tax administrators that started having a conversation with retailers. In this case, it was the Direct Marketing Association. And so, OK, what's wrong with the sales tax? They had these conversations, the business community gave the states a list of things and then what would it take for you to voluntarily collect sales tax? And then the business community went down back through their list of things that was wrong with the sales tax and then added a couple of things.

That then led to a thing called the Advisory Commission on Electronic Commerce, which the Advisory Commission on Electronic Commerce comes from the Internet Tax Freedom Act. So as part of the negotiation in the passage of the Internet Tax Freedom Act, Congress created a thing called the Advisory Commission [on] Electronic Commerce, which was a two-year commission whose job was to figure out what state law burdened electronic commerce.

The Advisory Commission [on] Electronic Commerce was actually a very— I was staffed to one of the members and it was a fascinating experience for the elected officials. This was the first time that elected state and local officials sat down as a group with the business community and talked about what was wrong with state law.

At the end of that commission, two of the members on the commission happened to be the presidents of their respective associations. So [Utah's] Governor Leavitt was on the commission and chair of the National Governors Association. And Senator Richard Finan from Ohio was on the commission and chair of the National Conference [of] State Legislatures. You had two serious elected officials on a very serious commission who also had very serious jobs in their respective associations.

They were then able to go back to their associations and to say, "Maybe these guys have a point. Maybe there's something wrong with our sales tax and we need to look at it." And that's when the streamlined sales tax started.

Andrea Muse: And can you just briefly talk about what streamlined [sales tax] did for states and how it worked?

Scott Peterson: It was interesting. Its original name was a zero burden sales tax system. And it was an attempt by the state tax administrators to really get serious about what it would take to not necessarily convince retailers to collect sales tax, but to eliminate the reason why they weren't collecting sales tax.

At that point in time, the states hadn't given the second thought to Congress or anything like that. They thought, "OK, if I can create a zero burden sales tax system, if the issue is that the state laws are imposing an undue burden on interstate commerce, then let's eliminate the burden." Hence the name, zero burden.

In the beginning, our goal was to figure out what it would take to completely eliminate the burden of collecting sales tax. It turned out to be an interesting exercise, but not a particularly accurate name. That's why we changed it to the streamlined sales tax.

Andrea Muse: And so once you hit Direct Marketing Association v. Brohl, where was streamlined then and where were states, I guess, going into the DMA case and then afterwards when you had that concurrence with the statements about Bellas Hess and the physical presence standard maybe needing to be revisited?

Scott Peterson: Most of the states were watching the DMA case. But honestly, in a lot of states, it was not a solution from the state's perspective. When the court said that this was a possibility, then the states were moved in that direction. But when the justice said that the states were bringing another case, then things changed.

So it was kind of a two pronged approach to the issue. "OK, we're going to take what the court said and that it's not an undue burden on interstate commerce to make a retailer give me purchase information and that I'll go out and do what I have to do." And then another group of states said, "Well, maybe that justice was serious, and granted it was just one justice who said that, but maybe we should take them up on it."

That created a more joint coalition of business and state folks to try to get a solution. For a long time, the business community had been lobbying Congress to give states the right to make retailers pay sales tax. So there had been a pretty cohesive coalition of state associations in the business community to get something done. 

That group of people put together a very focused attack plan on how to get legislation enacted that would give the Supreme Court a law to rule on that was radically different than what they had before. They hired a law firm that specialized in appeals to the United States Supreme Court, that's all that firm did. And they said, "Look at the Quill decision from 1992; figure out what the states did wrong. Look at what the Court said in 1992; look to see what the Court said was still a problem and then help us write a law that we can get a state to pass that would overcome all the objections that were listed in the Quill decision."

And so this firm wrote this law and then there was a very coordinated approach to getting a state to adopt that law. They chose South Dakota and South Dakota got it. And they did something that they never did before. They actually told the Court to find the law unconstitutional. I worked for the South Dakota Legislature for a dozen years. I've written thousands of pieces of legislation, you never put findings in legislation. The law is the law. You let the courts decide what the findings are.

In this case here, the legislature said, "This time, we're going to give you a law, an almost one-sentence law with three pages of findings. And our findings are why we think this law is unconstitutional, why we expect you to find it unconstitutional and why we expect you to do so very expeditiously."

And [that's] something that the courts in South Dakota took to heart and they filed unconstitutional expeditiously.

Andrea Muse: And so the U.S. Supreme Court's decision there, was that a surprise? What was the thought when that decision came out? And then also, what was the state's and the business community's interpretation of that opinion?

Scott Peterson: I was surprised. Actually, I expected the Supreme Court to make a change. I thought to myself, and I told anybody dumb enough to listen to me, that they wouldn't have taken a case if they weren't going to make a change. I mean, why take a case for the third time — they come back, give you the same answer the third time; no one's going to do that.

And so, I said, but I have no idea what they're going to do. I assumed that they would do something like they did in Bellas Hess, which is lay out in maybe broad general terms what conditions had to exist before a state had the right to make a retail sales tax. I didn't expect them to simply get rid of Bellas Hess. And that's what was the shock.

It was kind of disheartening to me about the reactions that both the states and the business community had of the opinion. The business community said, "OK, well, Bellas Hess is gone. Physical presence doesn't exist. Is there something that we can read into the Supreme Court's opinion that puts limits on what states can do and what states have to have an effect to do?" And so I think a lot of people in the business community said, "OK, well, South Dakota does A, B, C, and D. If you don't do A, B, C, and D, you don't have authority to do this."

States said the opposite; that was just dicta. All they were doing was filling in the pages. They weren't actually creating a new paradigm about what was necessary to collect sales tax. And today, absent another Supreme Court decision, the states maybe have got that right because no one has done much since the Wayfair decision to make sales tax simpler.

Today, it's still very complicated. It's more complicated than it was in 2018. And while there has been some movement toward simplicity, when Texas did their one rate per state, that was a very positive simplification for out-of-state retailers.

Colorado was moving toward not one rate per state, but they're moving toward one place to register, file a return, and make a payment. Today, there's 70 in Colorado.

Andrea Muse: And so, going to that, it sounds like as you're saying that a lot of issues for businesses is maybe that there's no uniformity in the states. Are there particular issues that you haven't spoken about that you're seeing that businesses have a major concern with?

Scott Peterson: Cost. I mean, it's one of the things, and this has always been one of the complaints about sales tax compliance, is that the legislature writes a law making me, the retailer, your tax collector. And with perhaps some degree of shared responsibility in how that works, but often not. And that gets done.

So there's 47 or 48 different ways that that's done across the United States without any care often for how much it costs me. We did a survey of our customers trying to figure out, "OK, so Wayfair was five years ago. How has it impacted your life?" And I was surprised that this number of them, that five years later, still think sales tax is really complicated. It's getting more complicated.

Heck, 49 percent of the respondents in our survey said they've had to raise prices on their customers simply to offset the expense they've incurred to collect sales tax.

And it's hard, I think, for most people to think through all the different things you have to do to collect sales tax times 46. I mean, you have to know what the rate is. You have to know what's taxable. You have to know what the boundary is. You have to know what the tax return looks like. You have to know how to make a tax payment.

So there's five things you absolutely have to do anytime you collect sales tax; then you take the times to 46 jurisdictions to have a sales tax. So you have all the things that were wrong with the sales tax before Wayfair are still there, and the technology is a lot better today, but all the complexity still there.

Andrea Muse: So do you foresee any of that changing in the future for Wayfair, either positively or negatively?

Scott Peterson: I really don't. The only way that I would see that there's going to be a change in the future is if someone gets the Court to say that some particular thing about a sales tax is still an undue burden on interstate commerce. We've got this case in Louisiana where Halstead Beads is suing the state in the parishes down there, arguing that it's an undue burden on interstate commerce to make them spend money to collect sales tax when the amount of money that they spend to collect the tax is greater than the tax.

To me, that is a great argument and in a lot of ways we don't see that an awful lot. But there are situations where it would cost more to collect the tax than you would collect in tax. If the courts were to side with Halstead Beads in that case, it would force Louisiana to figure out a way of creating probably one tax system down there.

My guess is, though, there's probably not as much of a change that would come from that as perhaps Halstead Beads would like because in reality, you end up with either what they do in Texas, which is one rate for out-of-state retailers, or you do what most other states do, which is you have state administration of the tax. And while the Louisiana legislature has been trying to get to at least one level of administration for their sales tax, they haven't been successful.

And that may be the only thing that would come out of that case is, OK, so instead of having the state and 70 parishes with a sales tax, or no, you still have the state and 70 parishes with a sales tax. Instead, you have one return instead of 71; going from 71 to one is an enormous cost saving. But that arguably could be the only thing come out of it. So, no: I don't see a lot of change coming. I don't see simplicity and uniformity in our future.

Andrea Muse: And I guess, predictions for the future, you said you're concerned about Wayfair maybe being expanded to other tax types. Is that [a] significant concern, and are there other challenges you see coming?

Scott Peterson: For a very long time, we have had a shift in the way states think of their corporate income tax. Long ago in the '50s, UDIPTA [the Uniform Division of Income for Tax Purposes Act] was enacted, and there was a uniform treatment of corporate income for state corporate income tax purposes, and you had a three-factor formula: payroll, property, and sales. And you would take those three factors; you'd create a formula, and you would look at every state's factors, according to the whole country. Then you would uniformly divide that income out, and if you taxed it, you did. If you didn't, you didn't.

At least 25 years ago, states started to change and they started to move towards sales. First, they double-weight sales, then they triple-weight; they'd say within the formula: double-weight sales or triple-weight sales. Now, they're simply moving away from the formula together and using sales as the only factor for apportioning corporate income.

Well, if you're going to use sales only as how you apportion income, you almost kind of have to use sales as the nexus determination. And that's where I see most states going, is going to single-factor sales and sales only, not single fine sales only, and then using sales as nexus for corporate income tax purposes. And then have some sort of economic nexus threshold.

I mean, we have that today. Hawaii's economic nexus threshold for their corporate income tax is the same as their Wayfair economic nexus for sales tax. Texas is the same. California's the same. I expect them all to do that. I don't know what Oregon's going to do. They don't have a sales tax, so it's going to be a challenge for them. What that does though is create an almost automatic obligation to file a corporate income tax return or some sort of income tax return where you're collecting sales tax.

If you [have] to have more than $100,000 in sales to collect sales tax, you're probably going to have the same threshold for income tax purposes. And those returns aren't simple, and I've looked at several: They're hard; you have to think about your whole practice. And sometimes they come with minimum fees, which is unusual in the sales tax. And I can't think of a state that has an obligation. I know for a fact: If you don't have any sales in the states, you don't collect any tax; you file a zero sales tax return. You can file a zero corporate income tax return in states and still owe them money because there's a minimum fee that goes along with filing that return. And that is a, in my opinion, rather serious burden. I mean, I suppose I appreciate what the states are thinking when they impose that because they say, "OK, well, it cost us money to do that return, so you got to pay something."

Well, that's not the way the sales tax works. Figure out a way of automating it so that you don't have the expense that goes along with it. And so that one concerns me.

Otherwise, most of the taxes that are or could be impacted by Wayfair involved the shipment of something or the receipt of something by somebody outside of state. And so while they may call them a gross receipts tax or an excise tax or something like that, you see a lot of very similar type of transaction components, as you would a sales tax. So I expect those to continue to be expanded via Wayfair. I don't think they're as complicated as, say, the corporate income tax would be.

Andrea Muse: I think that's a good place to leave it. If you had one sentence to sum up how Wayfair has impacted states five years on, if you look at it, what would you say?

Scott Peterson: I would say that after five years that the states were right, that there was a lot of sales being made in the state for which there was no tax being collected. And all the arguments over the years that this is a $10 billion, a $15 billion, a $25 billion issue — the high numbers have all been proven right. And the business community was right as well. If you don't make changes in the way tax is administered, you just expand the complexity.

I tell people that Wayfair didn't make sales tax complicated. Wayfair just exposed everybody to all the complexity that was already there. And I think that's going to be our future. I'll leave it at that.

Andrea Muse: Thanks so much for talking. It is really great to have an expert kind of walk through both the history and the case and also where the business community as well as states are with Wayfair and the issues there.

Scott Peterson: Andrea, thank you so much. We appreciate you all giving us an opportunity to speak. All I ever do is talk about sales tax. Sometimes I like talking about the history because, like I said, I'm trying to figure out what this marketplace facilitator law means to that particular company and forgetting that this is all brand new, relatively. I mean, we are still at the very early stages of Wayfair and this international collection of taxes. So thank you, very much. I appreciate the opportunity.

David D. Stewart: And now, instead of coming attractions, joining me now with an important reminder is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do you have for us?

Paige Jones: Thanks, Dave. The submissions period for the Tax Notes Student Writing Competition will be closing soon. Each year, we recognize superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Submissions are due by June 30. Visit taxnotes.com/students for more details.

David D. Stewart: That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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