By Joni Johnson-Powe, JD, CPA Taxnologi Solutions, LLC – CEO/Principal
As I am sure you know, the Supreme Court ruled on June 21, 2018 in favor of South Dakota which enacted a statute requiring out-of-state retailers to collect tax if that retailer has engaged in $100K in sales or 200 transactions in the state.
In retrospect, prior to the oral arguments in April, there seemed to be a strong sense in my professional circles that the Supreme Court had no other option than to overrule the “physical presence” requirement in Quill. However, immediately following oral arguments, there was a swing in the pendulum of positions that perhaps the Court was going to “punt” and push the decision back to Congress.
Well, it was nail biter waiting on the final opinion, but the Supreme Court did decide by the narrowest of margins, 5-4, to overrule the longstanding rule of the land, Quill. As I read the opinion drafted by Justice Kennedy, I found myself highlighting sections, paragraphs, and interesting comparisons the way I did when I first read Quill in my Constitutional Law class in law school. Back then, however, my highlights were out of duty and the strong desire not to fail “Con Law”. This past week it was different. I had a true interest in connecting the dots, understanding the analysis, and relating back to what I had read in Quill over 20 years ago. Back in law school I had no idea that Quill would be part of the fundamental basis of my every day professional life in the state and local tax arena. It was probably 5 years after I had graduated from law school that the “light bulb” had finally turned on and I found an appreciation for what my law professor had been lecturing on in terms of “Due Process”, “Commerce Clause” and “stare decisis“.
And once again, these three concepts were cited throughout the opinion in Wayfair: Due Process – 14 times, Commerce Clause – 47 times and stare decisis – 14 times. However, I think what I found most surprising was Justice Kennedy’s strongly worded and recurrent suggestion that ruling in Quill was flawed and wrong. It highlighted that rejection of Quill’s physical presence standard is necessary to prevent the Court’s prior precedents from creating an “artificial competitive advantage”. The Opinion even went as far as to state that Quill had created a “sales tax loophole” and “judicially created tax shelter”. Wow!
I could go on and on about what I found most intriguing about the Opinion, but instead of boring you with my tax geekiness, I want to leave you with what I think this all means.
So here it goes:
1) Although many taxpayers (and practitioners) may beg to differ, I do believe that at the end of the day, the Court came out with the right decision. Why? Because for the last 5-10 years businesses have had zero clarity on what physical presence means on a state-to-state basis as concepts of click-thru, affiliate, marketplace, cookie, and economic nexus weaved and bobbed their way thru state tax rules, laws and court opinions. Now, there is more clarity…not complete clarity, but more.
2) The ruling helps to level the playing field between in-state companies and out-of-state companies while also recognizing that small businesses need some degree of protection. I found that the fundamental concept of fairness to be prevalent throughout Kennedy’s Opinion. However, I still believe states will need to ensure that the burden of compliance is eased for smaller businesses through more standardized definitions and simpler reporting requirements.
3) We’ll need to wait and see whether:
- Congress steps in to narrow the application of this new standard of “virtual presence”,
- Notice & Reporting rules in states like WA, CO, PA and 7 other states will change, increase, or go away,
- $100K or 200 transactions is the minimum, maximum or somewhere in the middle in terms of a “reasonable” threshold, and
- 3rd party software or state administered solutions will sufficiently help ease the compliance burden for smaller companies.
As I’ve said to many of my clients this over the last few weeks week, the journey continues and let’s wait to see how the dust settles. Stay tuned!!