Supreme Court Hears Wayfair Oral Arguments:
Are Most Internet Sales Now Subject to Sales Tax?
The Massachusetts Tax Alert™
By Attorney Yale Yechiel N. Robinson and Attorney Morris N. Robinson, CPA, LL.M.
April 16, 2018
The U.S. Supreme Court will hear oral arguments in South Dakota v. Wayfair, Inc. on Tuesday, April 17, 2018. In response to a possible change in the law of state tax nexus, we suggest that businesses should evaluate their current tax compliance and consider making a voluntary disclosure if they are not fully compliant with state sales tax laws.
Overview of South Dakota v. Wayfair, Inc.
The state of South Dakota seeks to enforce recent legislation requiring out-of-state sellers with significant in-state sales to collect state sales taxes from in-state consumers, whereby the sellers would then pay over the sales taxes to the government of South Dakota. Wayfair and its co-defendants, a group of national e-commerce retailers without physical presence (warehouses or employees) located in South Dakota, argue that imposition of South Dakota sales tax places an unfair burden on interstate commerce, thus violating the Commerce Clause of the U.S. Constitution.
In legal terms, South Dakota (which is supported by most other U.S. states in an amicus brief) aims to overturn the Supreme Court precedent of Quill Corp. v. North Dakota, 504 U.S. 298 (1992), but Wayfair and other e-commerce retailers insist on maintaining the current law. An outstanding news article summarizing the legal and business ramifications of this litigation can be found in The Wall Street Journal (April 15, 2018).
Recent editorials and position papers illustrate the intense underlying policy debate. For example, on April 15, 2018, The Wall Street Journal published a staff editorial titled The Interstate Tax Grab, arguing that the status quo protects small businesses against overreaching compliance demands by distant states. Conversely, on April 11, the American Enterprise Institute published an article arguing that the Supreme Court should replace the absolute barrier of Quill with a balancing test that would allow South Dakota and other states to tax out-of-state sellers in appropriate circumstances.
The Supreme Court is likely to issue a decision in June 2018, just two months in the future. Many commentators anticipate that the Supreme Court could overturn Quill. The resulting upheaval will force small and mid-size retailers to reevaluate their compliance with state taxation in all 50 states plus the District of Columbia.
Consider a Voluntary Disclosure
The practical question is: What can small and mid-size e-commerce sellers do to prepare for the very possible overturning of Quill?
Our key recommendation is to consider the voluntary disclosure process. Attorney Morris N. Robinson, a co-author of this blog post, wrote two well-received articles in State Tax Notes, a national publication, in 2016. The articles are available at the following hyperlinks: (1) State Voluntary Disclosure Programs: An Overview (January 18, 2016), and (2) Use State Voluntary Disclosure When Complying With Expanded Nexus (February 29, 2016).
Our recommendation to consider voluntary disclosure is targeted to businesses who may find themselves noncompliant under current law. The benefits of voluntary disclosure include: (1) avoidance of the threat of criminal prosecution; (2) avoidance of liability for taxes before a limited lookback period of three, four, five or six years; (2) waiver of penalties for failure to file and failure to pay taxes within the lookback period; (4) in some states, the waiver of interest on back taxes within the lookback period. As part of the voluntary disclosure process, a business must register online as a taxpayer entity within the state, so that the business will continue to file and pay taxes in future months and years.
We also encourage businesses that are compliant now, but could become non-compliant if the Quill protections are overturned, to consider a similar strategic balancing of the benefits and costs of making a voluntary disclosure. (According to a commentator at SCOTUSblog, the Court is unlikely to overturn Quill retroactively. This means that businesses should probably have at least a few months to adapt to a new post-Quill reality.)
Most U.S. states have voluntary disclosure programs under their own state procedures. In addition, the Multistate Tax Commission (MTC) offers the Multistate Voluntary Disclosure Program for businesses that need to come into compliance with many states simultaneously. The MTC process may prevent certain taxpayers from the burden of opening voluntary disclosure files in multiple states separately.
Even if the Supreme Court upholds Quill, some states are aggressively enforcing nexus laws against out-of-state sellers. For example, Amazon announced in January 2018 that it would comply with a subpoena requiring the online retail giant to disclose the identities of certain third-party “Fulfillment by Amazon” sellers to the Massachusetts Department of Revenue.
Conclusion and Disclaimer
Please note that this blog post does not constitute legal advice. Before beginning a voluntary disclosure process, a taxpayer should consult a tax professional. The authors of this blog at M. Robinson Tax Law in Boston are familiar with the Multistate Voluntary Disclosure Program and the procedures of individual states. We would be happy to provide a brief telephone consultation without charge at 617-428-6900.