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FOCUS 


 make waves


By Brent Watson, CPA


Brent Watson, CPA, is the principal at SALTA, PLLC, which he founded  Tulsa, Okla. An OSCPA  has served on the OSCPA’s    serves on the Oil & Gas 


finance should be aware that the recent U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. will have a major impact on many companies. News coverage commonly reported this decision would force e-commerce sellers like e-Bay and Land’s End to begin collecting sales taxes. (Larger sellers, like Amazon, had already begun collecting sales tax.) However, the impact will be felt far beyond this, affecting not only myriads of small online sellers, but also traditional brick-and-mortar businesses, including wholesalers and manufacturers that have multi-state sales.





What was the Wayfair decision? On June 21, 2018, by a 5-4 vote, the Court’s


ruling radically overturned foundational tenets of sales tax law pertaining to nexus, a concept meaning a taxpayer has sufficient connection with a state to allow the state to impose its sales tax laws on that taxpayer. In doing so, the Court reversed its own rulings issued over the past 51 years (National Bellas Hess, Inc. v. Department of Revenue of Ill.; 1967 , and Quill v. North Dakota; 1992 ), which had stipulated that in order to comply with the commerce clause of the U.S. Constitution , a physical presence test must be met for states to impose their sales tax laws on a seller. In the Quill case, the Court stated substantial physical presence was required to establish nexus. Since the Quill case was decided in 1992, two


factors have undermined the physical presence test for nexus. First, e-commerce emerged and grew explosively. Traditional retailers saw this as a threat to their businesses (partly because remote sellers were not required to collect sales tax); while state tax departments saw this as a threat to sales tax collections.


8 CPAFOCUS September/October 2018


any CPAs don’t focus on sales tax matters. However, CPAs in public practice as well as those in corporate


Second, as a result of the first factor, states, with backing by brick-and-mortar retailers, continually enacted laws imposing sales tax collection duties on out-of-state sellers based on very minimal levels of presence in their respective states. Tis was made possible because the Court’s original decisions did not define the term “substantial physical presence” and because of inaction by Congress, despite a clear invitation by the Court for them to clarify the nexus issue. When the Wayfair decision was issued, 31


states required tax collection by sellers who had very minimal physical presence in a state, such as airport stopovers by employees, contracts with in-state advertisers (even via a click-through on a computer screen) or by placing website cookies on computers within the state. Perhaps the final nail in the coffin for the physical presence standard was the passage of laws in the past two years requiring sellers with no physical presence in a state to either comply with burdensome 1099-like reporting duties or to collect total sales tax for that state whenever an annual sales threshold (some being as low as $10,000) was exceeded. Tis was made possible by the Court’s refusal to act in a 2015 case, Brohl v. DMA , to overturn a Colorado law that first imposed these requirements. Enacting these requirements practically spelled the end of the physical presence test, as compliance with notification laws is costlier than collecting tax. Based on the Court’s decision, the new question for judges evaluating constitutionality of a sales tax imposition, instead of asking whether a state’s laws sufficiently meets a physical presence test, is asking whether the tax discriminates against interstate commerce. If complying with a state’s tax system is sufficiently burdensome on an interstate seller, it is unconstitutional, regardless of the level of the seller’s physical presence in the state.


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