Three States Seeking Retroactive Sales Tax Post Wayfair Decision

With ecommerce, catalog and other merchants still wrestling with the impact of the U.S. Supreme Court’s June 2018 Wayfair decision, some states are retroactively seeking sales tax from out-of-state online sellers.

California, South Carolina and Louisiana are separately seeking taxes as far back as five years. South Carolina is targeting Amazon’s third-party remote sellers, and Louisiana is doing the same with Walmart. Legal challenges are underway in both southern states.

The Supreme Court ruled 5-4 in Wayfair that remote sellers with no physical presence in a state must collect and remit the sales tax for each state where they do business.

Merchants have scrambled to comply with the change in law and its detrimental effect on the bottom line. A recent poll from the American Catalog Merchants Association (ACMA) found 56% of merchants surveyed said their sales decreased as a direct result of the SCOTUS decision.

Michael Bernard, former General Manager and U.S. Tax Counsel for Microsoft who is now Chief Tax Officer for Vertex, Inc., a provider of tax technology and services, questions states’ legal justification for retroactively seeking sales taxes.

The amicus brief in Wayfair signed by more than 40 states, he pointed out, indicated retroactive tax collection wasn’t an issue of concern:

Nor does the possibility of retroactive tax liability constitute a valid reason for maintaining the physical- presence rule. South Dakota’s law bans retroactive tax liability, eliminating that question as an issue in this case. Even if retroactive liability were a concern, existing regulations in many States will prevent retroactive application of a new post-Quill rule. Should other States choose to take a different approach, their normal procedures for implementing significant regulatory changes—including advance notice—provide adequate safeguards to abate any surprise that might accompany a new Supreme Court rule. And finally, if those safeguards do not resolve the question, this Court has the authority to craft a holding that applies prospectively only for all retailers and taxpayers.

Arguing that Wayfair was “a prospective, future looking tax,” Bernard calls the attempts now by states to collect taxes retroactively “a violation of notice and fundamental fairness” because “there was no law back in 2012.”

The issue of retroactively collecting taxes is addressed more directly elsewhere in the amicus brief:

Retroactive tax liability. Defenders of the physical-presence rule often cite the possibility of retroactive tax liability if Quill is abrogated. BIO at 34–36. That concern was also present in Quill, and the amici States acknowledge that this Court has said imposing retroactive tax liability can raise “thorny questions.” Quill, 504 U.S. at 318 n.10.

But those questions are not presented in this case. By its terms, South Dakota’s law is prospective in operation only; imposing retroactive tax liability is prohibited and an injunction bars enforcement of the law while the instant case remains pending. Pet. Br. at 2a–3a. Because of these features of South Dakota’s law, any holding by this Court abrogating Quill will not apply retroactive tax liability on Respondents. Their tax liability, if any, will be on a prospective basis only. South Dakota’s law thus removes the retroactive-tax- liability issue from this case.

“That amicus brief said in no uncertain terms retroactivity isn’t an issue in the Wayfair case,” Bernard argues. California, South Carolina and Louisiana are nevertheless pursuing retroactive collection.

In California, which has the nation’s highest threshold for the application of remote seller sales tax at $500,000, Bloomberg reports Gov. Gavin Newsom’s latest budget seems to limit retroactive collection to no more than three years. Bernard believes California still intends to go back further. The change in law is at the notice stage, and a legal fight is anticipated.

Bernard suspects the states are aggressively pursuing retroactive collection “because there’s a lot of money at stake,” and because “the states have a legal position that is at least arguable in court.”

Quantifying the money, he estimated Amazon collecting sales tax for all of the third-party sellers that meet the threshold for the period of time in question in South Carolina could amount to $400 million.

States are citing the agency or the bailment legal theories, which are encoded in statutes and the laws. “If you have a bailment or you’re an agent for somebody, you have a responsibility for collecting taxes,” Bernard explains. The states are arguing, “You are agents of these people and under our collection laws you should have been collecting taxes.”

Amazon and Walmart argue they’re independent, that the SCOTUS decision in Quill (establishing physical presence as the metric for applying sales tax) was the law during the period the states are targeting, and at that time the sellers had no physical presence.

“Those companies are going to fight this to the end,” Bernard said. “It goes back to fairness and notice. It’s like changing the size of the playing field.”

If the states prevail, Bernard said the question is whether Walmart or Amazon would have to pick up the tab. If the remote sellers are held responsible, he said, “It literally will drive remote sellers, small sellers, out of business.”

By contrast to these attempts for retroactive sales tax collection, Florida is only now moving to collect sales tax from remote retailers. S.B. 126 is currently in the legislature’s Finance and Tax Committee.

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