Wayfair Comes to Wisconsin
The Supreme Court’s June 21, 2018 ruling in South Dakota v. Wayfair, Inc., No. 17 – 494 2018 WL 3058015 (U.S. June 21, 2018) significantly modified the application of state sales tax collection laws to remote sellers. By overturning its prior ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which limited imposition of a state’s sales tax collection requirements to sellers with a physical presence in that state, Wayfair has created the potential for states to enforce their sales tax collection requirements against remote sellers.
What Requirements Must States Satisfy to Impose Sales Tax Collection Laws on Remote Sellers?
While states may now have the opportunity to compel collection of sales tax by remote sellers, their authority to do so is not unbridled. Any efforts taken by a state to enforce its sales tax collection laws against a remote seller must not be an unfair burden on interstate commerce. Based on the Supreme Court’s ruling in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), a state’s efforts to impose sales tax collection requirements do not unfairly burden interstate commerce if collection of sales tax by those sellers: (i) applies to an activity that has a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the services the state provides.
Despite remanding the Wayfair case to a lower court for analysis of the South Dakota statute at issue under the Complete Auto test, the Supreme Court did note some aspects of that statute that satisfied the Complete Auto test. First, application of the statute was limited to remote sellers meeting one of two criteria in the previous calendar year or the current calendar year: (i) gross revenue of sale of tangible property, and any products transferred electronically, or services delivered into South Dakota exceeding $100,000; or (ii) sale of tangible personal property, any product transferred electronically, or services for delivery into South Dakota in 200 or more separate transactions. See S.B. 106, 2016 Legis. Assemb., 91st Sess. § 1 (S.D. 2016) and Wayfair, at *5. Secondly, Section 5 of South Dakota Senate Bill 106 specifically stated that it would not apply retroactively. Wayfair, at *5 (citing S.B. 106, 2016 Legis. Assemb., 91st Sess. § 5 (S.D. 2016)). Finally, at the time the statute was enacted, South Dakota had already adopted the Streamlined Sales and Use Tax Agreement (SSTRA), which was significant for two reasons: (i) the SSUTA requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules; and (ii) the SSTRA also provides sellers access to sales tax administration software paid for by the State of South Dakota, and holds sellers who choose to use such software immune from audit liability relating to errors in the software.
What Does this Mean for Wisconsin’s Taxation of Remote Sellers?
The State of Wisconsin has already begun studying the potential impact of Wayfair on its state tax base. Based on a Memorandum recently issued by the Legislative Fiscal Bureau (“LFB”) to members of the Wisconsin Legislature, the Wisconsin Department of Revenue has indicated that current law now requires it to begin collecting tax on remote sales. See Legislative Fiscal Bureau Memorandum, “South Dakota v. Wayfair, Inc. – Sales and Use Tax Collections on Remote Sales” (July 2, 2018) at p. 2. This appears to be based on the contention that, since Wisconsin’s imposition of tax collection requirements on remote sellers was previously limited by the physical presence requirement in Quill, and that requirement has been removed, Wisconsin should now be free to require that remote sellers collect and remit sales tax. Id.
While it is true that the physical presence requirement in Quill has been removed, the requirements under Complete Auto remain in place. Unlike South Dakota, Wisconsin currently has no statute in place specifically regulating the sales tax collection requirements of remote sellers. As a result, there is currently no statutory language restricting application of the sales tax collection rules to remote sellers who have very limited contacts with the State of Wisconsin, and there is no language prohibiting application of the sales tax collection rules to remote sellers on a retroactive basis. Therefore, immediate application of the Wayfair requirement could result in activity that would unfairly burden interstate commerce under Complete Auto. The LFB acknowledges this in its Memorandum, stating that “it is unclear that requiring out-of-state vendors to collect tax without changes to the statutes or administrative code would comport with the Complete Auto test,” and noting that the Department of Revenue is currently reviewing this issue. Id. at 3.
Until subsequent guidance is issued, it is unclear exactly when the State of Wisconsin will expand its sales tax collection requirements to remote sellers. Since Wisconsin has already adopted the SSTRA, it is likely that any guidance issued in response to Wayfair would focus on creation of a substantial nexus requirement for remote sellers. The LFB estimates that “[i]f changes were made to the administrative code or the statutes such that the [Wisconsin Department of Revenue] could extend nexus to remotes sellers beginning October 1, 2018, it is estimated that state sales and use tax revenues would increase by $90 million in 2018 – 19 and $120 million in 2019 – 20. Further it is estimated that county and professional stadium park district sales and use tax collections would increase by $7.7 million in 2018-10 and $10.3 million in 2019 – 20.” Id. For this reason, it is likely that we will see these changes implemented sooner rather than later.
What Can We Do Now to Prepare for these Changes?
Given the incredible increases in sales tax collections now possible under Wayfair, states will likely move quickly to enact legislation or administrative rule changes related to remote sellers. In order to be ready for these changes, we recommend that businesses selling taxable goods and services to customers in other states consult with a member of our tax practice group as soon as possible to discuss the impact that expanded tax collection requirements will have on the tax-related language of your customer and vendor agreements, as well as the tax-related terms and conditions contained in your standard invoice language and other contracts.
UPDATE: Following publication of this post, the Wisconsin Department of Revenue announced that, beginning October 1, 2018, it will require remote sellers to collect and remit sales or use tax on sales of taxable products and services in Wisconsin. It will also be developing standards for administering sales tax law on remote sellers by administrative rule, which will be consistent with the statute cited in Wayfair, including the small seller exemption for remote sellers who do not have annual sales of products and services into the state of (1) more than $100,000, or (2) 200 or more separate transactions. For more information on the Wisconsin Department of Revenue’s interpretation of Wayfair, visit the following link: https://www.revenue.wi.gov/Pages/Businesses/remote-sellers.aspx.
DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.