For remote retailers, marketplace providers, international sellers, and many others, the world may change dramatically in the next month or so.
On April 17, 2018, the U.S. Supreme Court heard oral arguments in South Dakota v. Wayfair, a case in which South Dakota seeks to have a statute imposing economic nexus standards on remote sellers upheld by the court.
Depending on the outcome, the landscape of sales and use tax collection in the United States could be very different very soon. With roughly 10,000 state and local tax jurisdictions in the U.S., companies should consider now how they can prepare for a change in the current standards.
Where Are We Now?
In its 1992 Quill v. North Dakota decision, the U.S. Supreme Court ruled that a state cannot require a business to collect use tax from in-state customers if the business has no physical presence in the state. In the 25 years since that case was decided, states have been increasingly aggressive in their efforts to narrow Quill’s effect. However, Quill is currently the law of the land for use tax collection.
In recent years, several states have adopted provisions that require sellers with no physical presence to collect sales and use tax if they exceed certain bright-line sales or transaction thresholds, often specifically acknowledging that these “economic nexus” standards directly conflict with the Supreme Court’s holding in Quill.
What Might Be Ahead
In its petition for certiorari (a review of the decision), South Dakota asked the Court to revisit and abrogate the physical presence requirement that the Court upheld in Quill.
Although the business community will have to wait for the final ruling sometime in June, one thing is certain: a reversal of Quill would drastically impact remote sellers, particularly companies making sales into the U.S. from foreign countries.
It is unlikely the Court would adopt a bright-line sales and use tax nexus rule which would establish a clear standard based on sales or transaction volumes in its decision.
Instead, a reversal of Quill could create substantial uncertainty for remote retailers.
Unless Congress acts to adopt a national standard, there will likely be little to no uniformity of applicability of the nexus standard among the states and — in many states — no clear guidance for retailers on when they are required to collect.
With or without guidance, many sellers may well need to begin collecting tax in states in which they lack a physical presence shortly after the Court rules. The time to prepare for this possibility is now.
How Companies Can Prepare
If the Supreme Court overturns Quill’s physical presence requirement, a company’s infrastructure for transaction tax processing, compliance, and accounting will need to change quickly.
To support sales and use tax compliance, companies will need a system capable of tracking delivery locations, determining taxability, identifying tax rates, ensuring appropriate accounting, and providing the information required to file returns.
Companies will need to consider how indirect tax compliance and accounting are handled, whether the processes are scalable to meet increased demands, and whether the technology (if any) underlying those processes is well-suited to the task.
There is no “one size fits all” approach to technology and tax compliance. Each business will need to determine the approach best fitted to its needs.
Some companies may desire to outsource certain pieces (e.g., taxability and rate determination) of the compliance process and rely on a provider to receive the appropriate information from their enterprise resource planning (ERP) systems; to make appropriate tax determinations; and to deliver the transaction data back to the ERP system.
Other companies, because of their worldwide footprint and type of business, may consider implementing a new tax engine or upgrading a legacy tax engine to ensure greater control and adaptability to their unique needs.
Regardless of the approach ultimately taken, an overturn of Quill will require companies to evaluate their current indirect tax compliance and accounting approaches and determine if they are suited to a post-Quill world.
Given the possibility that companies may need to begin collecting taxes in new states within a short period, they should consider the following steps to help prepare for the outcome of the Wayfair case:
- Review business activities to determine where filing obligations may exist both before and after Wayfair.
- Consider the overall potential business implications, including additional costs related to technology updates and increased compliance requirements. Prepare for discussions with key stakeholders.
- Analyze the potential taxability of products and services in jurisdictions where the company may be required to collect, including current invoicing methods that may bundle taxable and nontaxable products.
- Determine whether current technology and personnel resources have the ability to support increased taxability analysis, tax compliance, document retention, and audit activity.
- Develop a plan for maintaining sales tax compliance if Quill is overturned, including consideration of technology needs, personnel needs, and the potential use of third-party services providers.
- Consider how the company will monitor sales tax changes (such as tax rates, law changes, and procedural issues) in the various jurisdictions.
Even if the Supreme Court does not overturn Quill, certain states have moved aggressively over the last decade to blunt and narrow the law’s impact. These state actions have already created a conundrum for remote retailers, and it is unlikely that these efforts will cease.
If Quill is not overturned, it is likely that additional states could adopt “apps and cookie” nexus standards, which assert that the use of in-state apps or cookies constitute a physical presence, or use tax notice and reporting requirements, which require non-collecting sellers to provide certain information to the state and to purchasers.
Certain states could also continue to aggressively define what creates physical presence nexus and continue to press forward with imposing collection or reporting requirements on electronic marketplace operators. Those kinds of state actions will create many of the same risks for sellers as an overturn of Quill and require them to address similar questions and challenges.
Kent Johnson ([email protected]) is a partner and national leader for indirect tax services in the State and Local Tax practice of KPMG LLP. Harley Duncan ([email protected]) is a managing director and leader of the state and local tax group in the Washington National Tax practice of KPMG. The authors thank Sarah Vergel de Dios ([email protected]), manager in the state and local tax group of the Washington National Tax practice, for her contributions to this article
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.