Supreme Court’s Wayfair Decision and Its Impact on Tax Compliance

By Ryan Gonzales
Associate, Taylor Porter

In 2018, the U.S. Supreme Court issued an opinion in South Dakota v. Wayfair which held that taxpayers no longer need to have a physical presence (such as offices, property, or employees, for example) within a state to be required to collect and remit state sales and use taxes.[1] Many states have responded by increasing their efforts to collect taxes from businesses selling or operating within their jurisdictions but not paying any taxes, and several states, including Louisiana, have enacted legislation designed to impose tax on business that were not previously subject to taxation. Consequently, businesses nationwide are beginning to discover that they should be filing additional tax returns in new jurisdictions. Business taxpayers everywhere should evaluate their operations and tax compliance footprint to determine if potential tax exposures could exist in new jurisdictions.

In Wayfair, the Court considered a South Dakota law that requires remote sellers (i.e., sellers located outside of South Dakota making sales to customers within South Dakota) to collect and remit state sales tax if, in a calendar year, a seller either earns over $100,000 of revenue from sales of goods or services delivered to customers in South Dakota, or sells goods or services for delivery into South Dakota in 200 or more separate transactions. By holding that a taxpayer’s physical presence within a state is no longer required for a state to impose sales and use taxes, the Court overturned its rulings in two prior cases, Quill Corp.[2] and National Bellas Hess,[3] noting that the physical presence standard established by those cases is “unsound and incorrect” as “[e]ach year, the physical presence rule becomes further removed from economic reality” because it is becoming increasingly easier for businesses to make sales across state borders due to advances in technology.

In effect, the Wayfair decision permits states to impose sales tax collection obligations based upon economic activity within a state (i.e., “economic nexus”) rather than physical presence within a state. Although some states, including Louisiana, already had begun to implement the concept of economic nexus before the Wayfair decision was issued, many states have responded to Wayfair by enacting legislation designed to eliminate a physical presence rule, and the number of states reacting this way continues to grow. Much like South Dakota’s rule, Louisiana requires out-of-state sellers of certain goods or services to collect and remit sales taxes if the seller either earns over $100,000 of revenue or sells goods or services in 200 or more separate transactions in Louisiana.[4] Furthermore, Act 569 of the 2016 Regular Session requires remote sellers who do not meet the minimum economic nexus requirements to notify purchasers that online purchases of certain goods and services are subject to use tax in Louisiana unless specifically exempt.[5]

One important issue which remains unclear in light of Wayfair is just how “substantial” the level of economic activity within a state must be to exceed the minimum threshold required for taxation. This point was not addressed by the Court and states appear to be defining various levels of economic activity as being sufficient nexus, or connection with the state, to justify taxation. Additionally, local taxing jurisdictions (i.e., counties/parishes and municipalities) are also beginning to implement new rules which look to economic nexus as a way to impose taxes. And in states like Louisiana, which allows localities to have “home rule” (home rule refers to localities’ authority to establish local-level sales taxes), sales tax compliance can be incredibly burdensome. Moreover, it is not just sales and use taxes getting all the attention; states and localities also have begun to extend economic nexus inferences to other taxes such as income, franchise, and gross receipts taxes.

After Wayfair, nearly all businesses operating across state lines should spend some time analyzing their tax compliance function and considering whether they could have additional filing obligations which are being overlooked. Even foreign companies that sell to customers located in the United States are likely to incur new tax filing obligations. Also, prospective buyers of target businesses should consider past or future tax exposures which may arise resulting from a target’s operations in non-filing states. Most states, including Louisiana, have successor liability laws which transfer any liability for unpaid taxes. Such liability could extend back to the formation of an acquired target as statutes of limitation generally do not start until an initial tax return is filed.   

In summary, the Wayfair ruling and its aftermath have magnified the risk of tax exposures for businesses which have sales or operations within states in which they do not file any tax returns, and this risk will likely only increase over time. Taxpaying businesses should evaluate their operations and conduct analyses to identify potential exposures. If potential exposures are identified steps should be taken to mitigate total exposure, such as entering into Voluntary Disclosure Programs, which typically limit the number of tax years states examine, and in some cases waive or reduce penalties or interest. Whatever the course of action might be, something should be done if a taxpayer thinks it could have an exposure due to failure to file in certain jurisdictions. Doing nothing could result in a large tax bill down the road.   

[1] 138 S.Ct. 2080, 201 L.Ed.2d 403.
[2] 504 U.S. 298, 112 S.Ct. 1904.
[3] 386 U.S. 753, 87 S.Ct. 1389.
[4] LA R.S. § 47:301(4)(m).
[5] LA R.S. § 47:309.1.

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