State legislatures have been working for years to find ways to keep their revenue streams current with the rise of e-commerce by pursuing a variety of mechanisms to expand the bounds of their taxing authority. But on June 21, the United States Supreme Court blew the doors open with its decision in South Dakota v. Wayfair, which found that physical presence in a state is no longer a necessary precondition for requiring a retailer to collect sales and use taxes.
Consequently, it's important to look at what will come next as states try to orient themselves in this new tax landscape. New legislative innovations are possible, but there are generally three legislative paths that lawmakers could choose to pursue.
With several states enacting economic nexus bills in just the last few weeks, there are currently 18 states that have passed laws or adopted regulations asserting nexus based on sales rather than physical presence. The bills have typically followed the South Dakota model of a requiring either $100,000 in annual revenue or 200 separate sales from the state. Now these states have begun releasing new advisory opinions about how and when sellers must begin collecting and remitting taxes.
Given the billions of dollars that are at stake for states, these 18 states will surely not be the last. Economic nexus bills allow states to raise new revenue without having to overcome the political hurdle of arguing for a rate increase or brand new levy. In fact, they can argue that these bills levy the playing field between in-state and out-of-state businesses. Some states will choose to invest the revenue from these laws into new state programs and others will seek to return it directly to taxpayers in the form of commensurate tax cuts, but in either event the money will represent an enticing political prize for state legislators.
In addition, the Wayfair ruling also opens the door for states to begin requiring marketplaces or the sellers using those marketplaces to collect and remit sales taxes based on economic activity. Twelve states considered 30 bills that would impose a tax collection obligation on marketplaces during this year's legislative sessions and were enacted in Alabama, Iowa, Kentucky, Oklahoma, and, just this week, New Jersey.
Expanded Physical Nexus
Prior to the rise of economic nexus legislation across the country, states had been slowly working to push the boundaries of established physical nexus rules by requiring sellers who utilized in-state affiliates, agents, or services to collect the sales tax. These types of bills are unlikely to spring up in the future now that states have a more direct path to collection.
It's also possible that we'll see a few states continue to consider reporting requirement laws (i.e., measures that mandate that non-tax-collecting sellers notify all of their buyers about the buyer's responsibility to remit the use tax), especially with regard to sellers who are below the statutory thresholds to require collection. But these bills are also likely to wane as the states respond to Wayfair.
While states with economic nexus laws in place are preparing for collection, and many other states are considering bills of their own, several non-sales tax states are looking for ways to fight back against the rising tide. New Hampshire Governor Chris Sununu (R) is working with legislative leaders to develop a multi-pronged strategy to protect state taxpayers using the legislative, regulatory, and judicial means available to them. Similarly, a coalition of lawmakers in Congress have introduced the Stop Taxing Our Potential (STOP) Act, which aims to nullify the Court's Wayfair decision. Given the amount of revenue at stake for states and the fact that President Donald Trump (R) has expressed his support for the decision, it's unlikely that these efforts will advance in the near term.
Now that state governments are empowered to collect taxes on remote sales, we should expect that most will do so over the next year. The pace will vary from state to state depending on its current law, when the legislature next meets, if statutory changes are needed, and whether regulatory guidance needs to be promulgated. Now that the question of nexus is mostly settled for sales tax collection purposes, businesses are likely to reunite over the common cause of simplifying our sales tax system and making it more uniform. Meanwhile, we'll continue to provide updates as states work to implement collection in the wake of Wayfair.