Wayfair: The U.S. Supreme Court Throws Out the Physical Presence Requirement for Sales Tax Nexus – What Does This Mean for Remote Sellers?

As I predicted in my March 24, 2018 article “The Future of the Quill Sales Tax “Physical Presence” Nexus Standard – Part Two”, yesterday the United States Supreme Court threw out the 51 year old physical presence sales tax nexus standard, when it rendered its decision in South Dakota v. Wayfair, Inc., et al ., 585 U.S. __ (June 21, 2018).  At issue was whether South Dakota may require remote sellers to collect and remit sales tax without some additional connection in the State other than more than $100,000 in annual sales or more than 200 transactions.  The Supreme Court held that Quill Corp. v. North Dakota and National Bellas Hess Inc. v. Department of Revenue of Illinois -- which held that a state cannot require an out-of-state seller with no physical presence in the state to collect and remit sales taxes on goods the seller ships to consumers in the state -- are overruled, upheld the South Dakota nexus threshold, and remanded the case for further proceedings consistent with removal of the physical presence nexus standard.

Physical Presence Gone – No New Standard:  Calling the physical presence rule of Quill “unsound and incorrect”, Justice Kennedy delivered the opinion for the 5 to 4 majority, in which Justices Thomas, Ginsburg, Alito and Gorsuch, joined. While disposing of the physical presence rule, the Court chose not to establish a new standard, relying on the existing Commerce Clause doctrine to address taxpayer concerns regarding any undue burdens created by state tax laws.  The Court also upheld South Dakota’s law as constitutionally permissible under existing doctrine, though it admitted that only substantial nexus was at issue before them.  The Court also did not address retroactivity issues, and acknowledged that not only South Dakota’s, but other state nexus laws, may contain defects that impose undue burdens on interstate commerce aside from the nexus threshold.  The Court remanded the case for further proceedings consistent with the overturning of the physical presence standard.

 [I]n addition to South Dakota, only Illinois, Indiana, Kentucky, Maine, North Dakota, Vermont and Wyoming have adopted the South Dakota economic nexus law ....  As such, for now, we know that remote sellers that exceed these thresholds have a sales tax compliance obligation in at least these eight states.

What Now?:  As such, states may now require remote sellers with no physical presence in a state to collect sales tax on sales of taxable products and services delivered to customers in that state.  This ruling does not simply affect online retailers, but all sellers of taxable goods and services who make sales into state in which they lack physical presence.  However, as I explain in more detail below, in addition to South Dakota, only Illinois, Indiana, Kentucky, Maine, North Dakota, Vermont and Wyoming have adopted the South Dakota economic nexus law with a de minimis threshold of $100,000 in annual sales or 200 individual transactions, and measures that minimize the threat of undue burdens on interstate commerce.  As such, for now, we know that remote sellers that exceed these thresholds have a sales tax compliance obligation in at least these eight states.  Several other states - Alabama, Georgia, Iowa, Massachusetts, Mississippi, Ohio and Tennessee  - have adopted economic nexus laws, which ignore the physical presence, so long as the remote seller exceeds a certain sales threshold in the state, in annual value and/or number of sales.  It remains to be seen whether these laws will be enforced as is, or modified to reflect South Dakota-style provisions.  As for the remaining 31 states that impose a state sales tax, they will have to determine whether their existing laws provide sufficient “economic nexus” basis through which to assert jurisdiction over remote sellers of taxable goods and services, or whether they must amend their laws to adopt the South Dakota standard, or attempt an even lower threshold, perhaps with retroactive application.

Rest assured that States, with or without changing their current nexus standards, will heighten enforcement and audit activity of remote sellers....  As such, it is incumbent on taxpayers to begin considering [historical sales by state, and nexus creating activities]...

What Should Remote Seller’s Do?:  Rest assured that States, with or without changing their current nexus standards, will heighten enforcement and audit activity of remote sellers.  Expect many States to send out mass mailings and bulletins advising remote sellers of their obligations to register and remit taxes in light of the Wayfair decision.  And this applies not only to Internet retailers of products, but also remote sellers of services, such as software, information services, data services and communications services.  As such, it is incumbent on taxpayers to begin considering (1) historical sales by state; (2) nexus creating activities under existing state nexus provisions; (3) register where they determine nexus exists or the risk of nexus is material; (4) resolve any historical exposure proactively (and anonymously through Voluntary Disclosure Agreements); (5) implement sales tax compliance software solutions and processes; and (6) implement processes for tracking sales activity to determine when they exceed sales thresholds in state that adopt economic nexus standards.  State nexus provisions may create multistate sales tax compliance obligations for them now and potentially for prior periods, even before States begin to act.

It was Justice Kennedy who, in Direct Marketing Association v. Brohl, had called for states to enact legislation that would enable to Court to reconsider the Court’s 1992 decision in Quill.  The majority opinion notes that “[e]ach year, the physical presence rule becomes further removed from economic reality and results in significant revenue losses to States.”  Chief Justice Roberts wrote a dissenting opinion, in which he was joined by Justices Breyer, Sotomayor, and Kagan.

The Commerce Clause Doctrine Applied by the Court: Justice Kennedy began the Court’s analysis with a historical summary of the Court’s Commerce Clause jurisprudence, noting that “two primary principles mark the boundaries of a State’s authority to regulate interstate commerce: State regulations may not discriminate against interstate commerce; and States may not impose undue burdens on interstate commerce”, then noting that the validity of state taxes under Commerce Clause precedents require that state taxes “will be sustained so long as they (1) apply to an activity with a substantial nexus with the taxing State, (2) are fairly apportioned, (3) do not discriminate against interstate commerce, and (4) are fairly related to the services the State pro-vides. See Complete Auto Transit, Inc. v. Brady, 430 U. S. 274, 279.”  The Court noted that the Quill Court acknowledged that the test set forth in Complete Auto “might not dictate the same result were the issue to arise for the first time today. 504 U.S. at 311”

To paraphrase the Court, physical presence is not necessary to create substantial nexus, it creates market distortions, is an arbitrary standard, erodes public fairness and confidence through tax evasion, and the Court's prior error cannot be protected by stare decisis.

Physical Presence is Not Necessary to Create Substantial Nexus:  In overruling Quill and its 1967 predecessor National Bellas Hess, which Quill upheld, the Court first stated that “Quill is flawed on its own terms”, providing that “[t] he reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller’s liability to remit sales taxes. Physical presence is not necessary to create a substantial nexus.”

Physical Presence Creates Market Distortions:  Second, the Court focused on the market distortions created by the physical presence standard, noting that “Q uill puts both local businesses and many interstate businesses with physical presence at a competitive disadvantage relative to remote sellers. Remote sellers can avoid the regulatory burdens of tax and can offer de facto lower prices caused by the widespread failure of consumers to pay the tax on their own”, in effect producing “an incentive to avoid physical presence” and investment in multiple States.  To this, the Court’s opinion states that “it is certainly not the purpose of the Commerce Clause to permit the Judiciary to create market distortions” or “judicially created tax shelter[s]”.

Physical Presence is an Arbitrary Standard: The Court next considered the Court’s Commerce Clause jurisprudence, providing that it avoids formal standards, in favor of “a sensitive, case-by-case analysis of purposes and effects.”  The Court concluded that “Quill, in contrast, treats economically identical actors differently,” and for arbitrary reasons, citing an example of similarly situated sellers, one with inventory in a state and the other without.  Noting that the former seller would be required to collect sales tax under the physical presence rule, the Court stated that courts should not invalidate laws based on outdated, or anachronistic, formalisms, but should consider “functional, marketplace dynamics, on which states can rely in enacting and enforcing their laws.”

The Court provided that “[m]odern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill”, stating that “it is not clear why a single employee or a single warehouse should create a substantial nexus while ‘physical’ aspects of pervasive modern technology should not.”  The Court provided examples of such modern technology creating a “physical presence”, such as cookies saved on a customer’s hard drive, or data stored on a third-party server in the state.  According to the Court, “[it] should not maintain a rule that ignores these substantial virtual connection to the State” and “allows remote sellers to escape an obligation to remit a lawful state tax”, a result the Court called “unfair and unjust”, doing harm to “federalism and free markets”.

Physical Presence Erodes Public Fairness & Confidence Through Tax Evasion: The Court’s opinion continues that not only is the physical presence standard legally wrong, but that it creates an extraordinary imposition on state authority to raise revenue and carry out critical public functions.  In a direct attack on Wayfair itself, the Court stated that

What Wayfair ignores in its subtle offer to assist in tax evasion is that creating a dream home assumes solvent state and local governments. State taxes fund the police and fire departments that protect the homes containing their customers’ furniture and ensure goods are safely delivered; maintain the public roads and municipal services that allow communication with and access to customers; support the ‘sound local banking institutions to support credit transactions [and] courts to ensure collection of the purchase price,’ ... and help create the ‘climate of consumer confidence’ that facilitates sales.

In terms of fairness, the Court’s opinion provides that “there is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection.”  According to the Court, “it is essential to public confidence in the tax system that the Court avoid creating inequitable exceptions. This is also essential to the confidence placed in this Court’s Commerce Clause decisions. Yet the physical presence rule undermines that necessary confidence by giving some online retailers an arbitrary advantage over their competitors who collect state sales taxes.”

 ‘Stare Decisis’ Cannot Protect the Court’s Prior Error:  Considering the issue of stare decisis (the notion that cases must be decided the same way when their material facts are the same), the Court found ample distinguishing facts to overturn Quill, regardless of the principle of stare decisis.  First of all, the Court concluded that stare decisis “can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” Next, it stated that when the Court is wrong, it “should be vigilant in correcting the error”, and that it should not ask Congress to fix what it got wrong, when “the real world implementation of Commerce Clause doctrines now makes it manifest that the physical presence rule as defined by Quill must give way to the “far-reaching systemic and structural changes in the economy” and “many other societal dimensions” caused by the Cyber Age.”   Third, the Court noted that the physical presence standard is proving unworkable as applied to the Cyber Age.  Fourth, the Court noted that stare decisis should only serve to protect “legitimate reliance interests” calling the tax distortion created by Quill an opportunity for tax avoidance “in large part because consumers regularly fail to comply with lawful sue taxes” a fact exploited by remote sellers who advertise sales as ta free.  Lastly, as for concerns regarding the complexity of multistate sales tax compliance, the Court noted that “eventually, software that is available at a reasonable cost may make it easier for small businesses to cope with these problems.... And in all events, Congress may legislate to address these problems if it deems it necessary and fit to do so.”

While the Court declined to adopt a new sales tax nexus standard, in considering the South Dakota law at issue, the Court summarized that the South Dakota nexus standard (1) requires businesses whose sales exceed the safe harbor threshold of $100,000 in annual sales or 200 separate transactions to collect sales tax; (2) does not apply retroactively; (3) is effective in a state that is party to the Streamlined Sales Tax Agreement.   The Court also stated that its “Commerce Clause doctrine can protect against any undue burden on interstate commerce.”  For example, the risk of discrimination can be avoided because the in-state sellers collect and remit the same taxes as remote sellers, and while the Court noted that some small businesses with only de minimis contacts may seek to challenge the constitutionality of state tax collections thought to be a burden, “[t]hese issues are not before the Court in the instant case, and their potential to arise in some later case cannot justify retaining this artificial, anachronistic rule that deprives States of vast revenues from major businesses.”

In considering the constitutionality of the South Dakota nexus standard under the first prong of the Complete Auto test, the Court noted that this prong “simply asks whether the tax applies to an activity with a substantial nexus with the taxing State. 430 U. S., at 279. ‘[S]uch a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.’”  The Court concluded that nexus is clearly sufficient in this case “based on the economic ad virtual contacts respondents have with the State.”  Though the three other prongs of the Complete Auto test were not litigated or at issue, the Court in its dicta provided some guidance for the lower court on remand and other States considering similar nexus standards that include features designed to prevent discrimination against or undue burdens upon interstate commerce:

(1) the Act applies a safe harbor to those who transact only limited business in South Dakota;

(2) the Act ensures that no obligation to remit the sales tax may be applied retroactively;

(3) South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

The Court then vacated the judgment of the Supreme Court of South Dakota and noted that any such claims may be asserted on remand, consistent with its over ruling of the physical presence standard.

There is no "bright line" nexus standard, retroactive application of sales tax laws is on the table, states may add more virtual presence and economic nexus provisions, and taxpayers can expect States to increase audit enforcement of their existing nexus provisions, even without legislative or administrative change.

There is No Nexus Standard Today: In overturning Quill, by removing the physical presence requirement for sales tax nexus and upholding the South Dakota nexus standard, the Court provides specific criteria under which a state’s sales tax laws applicable to remote sellers will properly establish substantial nexus given repeal of the physical presence standard.  This should encourage other states to adopt the same law in order to require remote sellers to collect sales tax on sales to customers in their jurisdiction.  States would be able to do so with certainty that the law will withstand constitutional scrutiny.  This would also promote uniformity among the states, providing taxpayers with a bright line standard for the type or level of activity that will create nexus.  State would be able to address the level of activity by making the de minimis threshold higher or lower, depending on their fiscal needs.  Most important, the South Dakota law provides for prospective only treatment, which eliminates concerns relating to the retroactive application of the Court’s decision and historical liabilities for every taxpayer that has relied on the physical presence standard as a means for determining their sales tax compliance requirements.  States that adopt the South Dakota law could do so prospectively, resulting in an influx of newly registered taxpayers, effectively under amnesty, as most states would likely not focus enforcement efforts on the past when their efforts are focused on enforcing the new legislation.

However, the Court did not specifically limit the constitutionality of sales tax nexus standards to the South Dakota law.  As Justice Kennedy said the Court’s Commerce Clause jurisprudence avoids formal standards, in favor of “a sensitive, case-by-case analysis of purposes and effects.”  As such, while the Court’s analysis of the South Dakota nexus standard establishes a threshold over which the Court should likely uphold the constitutionality of a state nexus standard, the Court in Wayfair did not establish clear guidelines as to what other state nexus standards are constitutional.  This approach would only explicitly benefit the seven other states that have adopted the same South Dakota law, and could otherwise merely serve to support and proliferate the nexus standards that the remaining states adopt to expand their taxing authority, causing even more damage and uncertainty in state taxation.

Retroactive Application: While the Court noted that South Dakota’s law applies prospectively, something it considered a protection against undue burdens on interstate commerce, the Court did not the require prospective only application of its decision.  A such, the Court left open the opportunity for the most aggressive states to pursue retroactive application of the reversal of Quill, enabling States to assert nexus over remote sellers as far back as States choose to pursue sales taxes for historical periods.

Where Do I Have Nexus?:  At a minimum, once the South Dakota law is blessed in its entireity by the lower courts, and the laws are free to be enforced, remote sellers will likely have an obligation to register to collect sales tax in South Dakota, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, North Dakota, Rhode Island, Vermont and Wyoming, once they exceed the safe harbor threshold of $100,000 in annual sales or 200 separate transactions. However what about the other 34 states that impose a state sales tax?

The Tax Foundation provides a useful map of state efforts to tax remote sales. Currently, there are 14 states plus the District of Columbia that require Quill physical presence nexus for a remote seller before the state may assert sales tax compliance requirements.  As such, theoretically these states would arguably have to address this legislatively, or administratively, prior to requiring remote sellers to collect sales tax on sales to customers in their jurisdiction.  This leaves 31 states that have adopted some method for imposing sales tax compliance obligations on remote sellers, either considering certain activities to constitute physical presence, or by ignoring the physical presence requirement.   Of these states, and as summarized in the Tax Foundation map, we observe the following:

• South Dakota-style Economic Nexus Provision:  At least twelve (12) states, South Dakota, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, North Dakota, Rhode Island, Vermont and Wyoming, have adopted economic nexus laws with similar threshold limitations, which balance the needs for state collection against the need for uniformity, rate simplification, a de minimis threshold of $100,000 in annual sales or 200 individual transactions, and seeking prospective application. South Dakota’s law also seeks to meet the Court’s four-pronged test set forth in Complete Auto Transit v. Brady, ensuring that it does not discriminate against interstate sales and only taxes the state’s fair portion of activity in the state. [430 US 274 (1977)]  Notably, South Dakota is a member of the Streamlined Sales Tax Project, meaning they have already simplified their sales tax laws to promote simple and uniform application on interstate commerce.  The most recent Federal bills promoting taxation of interstate commerce (See Marketplace Fairness Act and Remote Transaction Parity Act) both require similar simplification efforts by a state prior to the state requiring remote sellers to collect sales tax.  Each of the other states have adopted the South Dakota template in their law.
• Alabama-style Economic Nexus Provision:  At least seven (7) states, Alabama, Connecticut, Georgia, Iowa, Massachusetts, Mississippi, Ohio and Tennessee have adopted economic nexus laws, which ignore the physical presence, so long as the remote seller exceeds a certain sales threshold in the state, in annual value and/or number of sales.  For example, Alabama’s law establishes nexus once a remote seller exceeds $250,000 in sales of tangible personal property.  Alabama’s law is prospective only, however Alabama is not a member of the Streamlined Sales Tax Project, and Alabama’s law does not thoughtfully consider the constitutional requirements of a valid state tax law as does the South Dakota template.  Conceivably, these states would not have to change a thing to enforce sales tax compliance over remote sellers, so long as the remote seller exceeds a certain sales threshold in the state.  Even though the “economic nexus” threshold of these provisions may survive constitutional scrutiny under the Court’s Wayfair decision, they may be subject to challenge on the grounds that they violate one of the other prongs of the Court’s Commerce Clause doctrine set forth in Complete Auto Transit;
• Marketplace Standard with Economic Nexus Provision:  At least eight (8) states, Alabama (eff. 1/1/19), Connecticut (eff. 12/1/19), Iowa, (eff. 1/1/ 19), Minnesota (eff. 7/1/19 or if Quill is overruled), Oklahoma, Pennsylvania, Rhode Island (eff. 8/1/18) and Washington State, have adopted marketplace nexus standards with economic nexus provisions, under which remote sellers, as well as marketplace facilitators (e.g., Amazon) are subject to notice and reporting requirements or may elect to collect and remit sales tax if they have more than – typically - $10,000 in annual sales, despite a lack of physical presence in the state.  Pursuant to these laws, Amazon has agreed to collect and remit sales tax on behalf of all remote sellers for sales made on its platform in Oklahoma, Pennsylvania, Rhode Island and Washington.  However, this does not protect such remote sellers from the enforcement of these provisions against them to the extent they sell on other platforms, including their own websites.  Remote sellers must still collect and remit on these sales, particularly now that Amazon has already elected on their behalf to collect and remit relative to the remote sellers’ sales transacted through the Amazon platform.  Conceivably, these states would not have to change a thing to enforce sales tax compliance over remote sellers, so long as the remote seller exceeds a certain sales threshold in the state.  Even though the “economic nexus” threshold of these provisions may survive constitutional scrutiny under the Court’s Wayfair decision, they may be subject to challenge on the grounds that they violate one of the other prongs of the Court’s Commerce Clause doctrine set forth in Complete Auto Transit;
• Existing Nexus Standards in States that Have Not Adopted Economic Nexus: Each of these states may have to address this legislatively, or administratively, prior to requiring remote sellers to collect sales tax on sales to customers in their jurisdiction.  However, many of these states have broad, “catch-all” definitions for what constitutes “doing business” (i.e., having nexus) in the state, and may be able to rely on existing statute to assert nexus over remote sellers.   For example, 34 Texas Administrative Code Section 3.286(a)(7) provides that a retailer is “engaged in business” in Texas if it has “sufficient contact with or activity within this state, as determined by state and federal law, to require a person to collect and remit sales and use tax.”  Arguably, the Texas Comptroller may assert nexus over remote sellers under this regulation without waiting until the next legislative session or even going through the administrative process to amend its regulations.
• Click-through or Affiliate Nexus Provisions:  At least 37 states have adopted click-through or affiliate nexus provisions.  Such laws may be insufficient to assert economic nexus over a remote seller, as these standards are premised on having a “click-through” agent or affiliated entity physically present in the selling state.  Furthermore, while tens of thousands of remote sellers utilize click-through and affiliate relationships (e.g., Amazon) to market their products, many remote sellers do not utilize such platforms.  As such, these provisions alone do not enhance state efforts to assert sales tax nexus over remote sellers;
• Notice & Reporting Requirements:  At least thirteen (13) states have adopted Colorado-style notice and reporting requirements.  The Court is not addressing the constitutionality of these laws, so it remains unclear how or if states would continue to exploit these requirements to “encourage” remote seller compliance. As such, these provisions alone do not enhance state efforts to assert sales tax nexus over remote sellers.

 
(NOTE: this certainly does not mean that certain states - particularly the most aggressive states, such as California - would cease their enforcement efforts over remote sellers.  Many remote sellers maintain inventory in the warehouses of Amazon and other third parties that facilitate the sale of a remote seller’s product through a marketplace.  Even under the existing Quill physical presence standard, most SALT professionals will agree that this establishes physical presence for sales tax purposes.  Though the argument exists that such remote sellers are not “retailers” within state sales tax laws, but that the marketplace facilitators are the actual “retailers” required to collect the sales tax, this issue was not before the Court in Wayfair.)

Nexus Free For All?:   It is a possibility that the Court’s decision could lead to a free-for-all, in which states would adopt myriad nexus standards, leaving taxpayers with no clear bright line standard for the type or level of activity that will create nexus.  For example, again, this approach would cause even more damage and uncertainty in state taxation.  However, it is more likely than not that most states will follow the path of least resistance and attempt to assert nexus under existing nexus provisions, to the extent they are broadly defined as in the case of Texas, or that they will adopt the South Dakota template to ensure enforcement without resistance, given that the Court has already blessed this statute.

Potential for States to Add More Virtual Nexus Provisions as Well?:  Justice Kennedy reminded us all that the Quill Court, in removing the physical presence requirement from the Due Process nexus standard, stated that physical presence “‘frequently will enhance’ a business’ connection with a State.”  In addition to economic nexus provisions, States may also continue to adopt virtual presence nexus standards under which a physical presence is established in a state by virtue of “cookies” installed on a customer’s computer by a remote seller, or by virtue of data stored on a third-party server or network of servers, or by virtue of allowing a customer to remotely access licensed software that the customer uses on their computer in the selling state.  Such implications will serve to redundantly bolster a state’s assertion of “economic nexus” over a remote seller, further minimizing constitutional challenges to state nexus laws.

It is incumbent on taxpayers to begin considering (1) historical sales by state; (2) nexus creating activities under existing state nexus provisions; (3) register where they determine nexus exists or the risk of nexus is material; (4) resolve any historical exposure proactively (and anonymously through Voluntary Disclosure Agreements); (5) implement sales tax compliance software solutions and processes; and (6) implement processes for tracking sales activity to determine when they exceed sales thresholds in state that adopt economic nexus standards.

What Should Remote Seller’s Do?:  Regardless, remote sellers should not rush out and register in every state in which they have sales.  There will be a period of acclimation.  Taxpayers, states and legal scholars will have to dissect the Court’s Wayfair opinion to realize its practical implications, and then - ideally - states will need to legislatively or administratively adopt principles by which they seek to require remote sellers to collect sales tax. This may take several months as states consider whether their existing nexus standards are potent enough to assert nexus and withstand constitutional scrutiny, or they have to amend their laws or rules.  We can, however, expect that some States will seek to simply issue a bulletin and/or mass mailing simply informing remote sellers that they are now required to register and collect sales tax.  Bolstered by this win, we can also expect States to increase audit enforcement of their existing nexus provisions, even without legislative or administrative change. As such, there will remain countless arguments about state authority to impose their laws on remote sellers, only furthering the need for Federal legislation in this area.  Ultimately, as States are increasingly able to require remote sellers to collect and remit sales tax, remote sellers who historically have not collected sales tax will now have to implement sales tax compliance protocol and will no longer maintain a competitive advantage over retailers who have long had to collect sales tax.

As such, it is incumbent on taxpayers to begin considering (1) historical sales by state; (2) nexus creating activities under existing state nexus provisions; (3) register where they determine nexus exists or the risk of nexus is material; (4) resolve any historical exposure proactively (and anonymously through Voluntary Disclosure Agreements); (5) implement sales tax compliance software solutions and processes; and (6) implement processes for tracking sales activity to determine when they exceed sales thresholds in state that adopt economic nexus standards.  These multistate nexus provisions may create multistate sales tax compliance obligations for them now and potentially for prior periods, even before States begin to act.

Currently, there are several good pieces of legislation before Congress that address these issues, and such legislation can be enhanced by the Supreme Court’s Wayfair decision.  Both the Senate and the House continue to pursue legislative measures to enable states to impose sales tax collection obligations on out-of-state retailers, regardless of whether they maintain a ‘physical presence’ or not.  [Marketplace Fairness Act (S.976); Remote Transaction Parity Act (HR 2193)]  In the Senate, since 2013, several legislators have presented versions of the Marketplace Fairness Act (MFA), most recently in 2017, which would give states more power to collect sales taxes from businesses that don't have a physical location within their borders, so long as the state participates in the Streamlined Sales Tax Project, or implements the simplification requirements and liability provisions of the MFA.  It’s earliest version (The Marketplace Fairness Act of 2013) passed with ease in the Senate in May 2013, however it stalled in the House amid claims by opponents of the measure that this looked to constituents like a new tax.  The new version, like its predecessors, is completely voluntary for states, provides a small seller exception, and would require a minimum six month waiting period before a state can begin requiring remote sellers to collect sales tax.  Similarly, the Remote Transactions Parity Act (RTPA) of 2017 authorizes states to impose sales tax collection obligations on certain remote sellers for sales, regardless of physical presence, so long as the state participates in the Streamlined Sales Tax Project, or implements the simplification requirements and liability provisions of the RTPA.  Like its Senate sibling, the RTPA is completely voluntary for states, provides a small seller exception, and would require a minimum six month waiting period before a state can begin requiring remote sellers to collect sales tax.  However, there are several notable differences between the MFA and the RTPA, including the size and applicability of the small seller exception, as well as potential audit liability for remote sellers and potential audit liability for sales tax automation solution providers.  There are many unanswered questions in both versions as well.  For example, liability of a remote seller to a customer for over- or under-collection of sales tax, how the legislation applies to remote sellers in foreign countries, whether state or federal courts have jurisdiction over cases involving administration of state taxes under these laws, penalties for noncompliance and the lack of uniformity in tax treatment of products and services among state participating in the Streamlined Sales Tax Project.

To the extent Congress does respond to the Court’s Wayfair decision, the manner in which Congress responds could cause more harm than good if Congress overreacts to the Quill reversal.   If Congress enacts legislation that grants states too much authority to tax interstate commerce, it will open the floodgates to state taxation in a manner that cedes too much of its Commerce Clause power to the states.  If Congress enacts legislation that is too restrictive, or imposes too high of a small seller exemption, states may not realize sufficient sales tax revenues associated with remote sellers, and may begin the post-Quill aggressive tactics all over again. As such, it is the author’s opinion that Congress will do nothing while it waits to see how the States and taxpayers respond to the Wayfair decision.  This may take several years to flesh out.  Again, this obviates the necessity for taxpayers to begin considering the multistate nexus provisions that may create multistate sales tax compliance obligations for them now and in the immediate future, even before States begin to act.