Any way it’s measured, 2018 was a momentous year in state tax developments. State tax professionals experienced a “Super Bowl and Olympics” in the form of the Supreme Court decision in Wayfair and the state and local tax implications of federal tax reform in the Tax Cuts and Jobs Act, according to Jamie Yesnowitz, principal and SALT national tax office leader at Top Six firm Grant Thornton. “Cleary the top two developments of 2018 were Wayfair and the implications of federal tax reform,” he said. “With respect to Wayfair, there’s the decision itself to analyze, South Dakota’s response to Wayfair, and then, of course, other states’ responses by providing their own economic nexus statutes.”
Here are the top state tax developments of 2018, according to Yesnowitz and the Grant Thornton SALT national tax office.
The impact of Wayfair and South Dakota’s response
The U.S. Supreme Court’s June 21, 2018, ruling in Wayfair concluded that states can impose sales tax-collecting requirements on out-of-state retailers, even those that do not have a physical presence in the state.
The court addressed South Dakota’s direct challenge to Quill, the 1992 decision that established the physical presence test for sales and use tax nexus. South Dakota’s challenge lay in the enactment of an economic nexus test that requires remote sellers, without a physical presence in the state, to collect sales tax if certain gross revenue or transaction thresholds were met — more than $100,000 of goods sold or 200 transactions within a year. “Wayfair really changed the core of how you deal with sales tax,” said Yesnowitz. “Now remote sellers have to consider whether their markets are large enough to be required to collect and remit sales tax in places they have not envisioned before.”
“South Dakota’s response to Wayfair was particularly interesting because of its inclusion of marketplace providers and facilitators. On or after March 1, 2019, certain marketplace providers will be required to collect and remit sales tax on behalf of sellers using their services, when certain conditions are met,” said Yesnowitz. “The constitutionality of this was not addressed by the court in Wayfair, since the law at issue before the court did not impose these rules on marketplace providers and facilitators.”
“One of the major challenges companies are facing is the non-uniform treatment of the new rule with different thresholds, tax bases etc.,” he added. “For many this is a giant tracking exercise.”
State responses to Wayfair
In addition to the remote-seller legislation inspired by Wayfair, the states are expanding the sales tax base through taxability of digital goods and additional types of services, Yesnowitz observed.
“Wayfair has provided these states with an opportunity, through legislation, to expand the sales tax base. Our sense is that in 2019 we will see continued legislation regarding Wayfair, particularly in the area of marketplace providers and facilitators,” he said. “We will start to see some state court decisions that reference Wayfair and pre-Wayfair nexus, for controversies that occurred prior to Wayfair, and we should begin to get a sense of how the courts will rule.” There will be repercussions on the income tax side as well, according to Yesnowitz: “States were beginning to consider how to implement expansive economic nexus provisions on the income tax side.”