In a post-Wayfair world, a state that disobeys the recommendations of U.S. Supreme Court Justice Anthony Kennedy could find itself in the crosshairs of future litigation, according to several state tax lawyers.
A pivotal section of the groundbreaking U.S. Supreme Court’s ruling in South Dakota v. Wayfair—which tossed out Quill Corp. v. North Dakota, the Supreme Court’s 1992 physical presence threshold for when states could tax remote sales—included suggestions that could strengthen the potential constitutionality of a state’s economic nexus model.
In the Wayfair opinion, Kennedy suggested a state’s law could pass constitutional muster if:
- the state installed a threshold that recognizes a “substantial nexus”;
- the state didn’t push for retroactive taxes; and
- the state is a member of the Streamlined Sales and Use Tax Agreement (SSUTA)—a program under which sellers collect tax voluntarily and remit it to the 24 state participants, which cover the filing costs and other fees.
If states don’t follow these suggestions, they could be ripe for further lawsuits, according to Jennifer Karpchuk, a state tax attorney at Chamberlain Hrdlicka in Philadelphia.
“Wayfair was decided based upon the specific facts of that case—large online retailers with substantial economic presence in a state that was a member of the Streamlined Sales and Use Tax Agreement, and a statute that provided for minimum thresholds and explicitly stated non-retroactive application of the law. States that fall outside of that fact pattern are certainly opening themselves up for litigation,” Karpchuk told Bloomberg Tax.
In Wayfair, the court stopped short of formally declaring South Dakota’s law valid in the absence of Quill. A South Dakota circuit court still has to bless the state’s economic nexus model—unless a bill lifting the injunction blocking the state from enforcing its law passes during an upcoming special session, and the parties settle.
Daily Tax Report: State
by Ryan Prete
September 4, 2018