UPDATED 6/27/18 (see bold)
On June 21, 2018, the United
States Supreme Court issued a ruling in the case South Dakota
v. Wayfair that has been hailed as a landmark decision regarding
the ability for states to tax interstate transactions. While it is a very important decision that
overturned decades old precedent, there are three reasons why it is not the
final word on the authority for states to tax the sale of goods over the
Internet.
It is an Incomplete Result
First, the case is a narrow
decision that only addresses part of the analysis required to approve the
taxation of interstate sales. The basic
legal question is whether a state’s assessment of taxes on out-of-state
transactions substantially burdens interstate commerce. Under the U.S. Constitution, only the federal
government has the power to regulate interstate commerce. As a result, the Constitution implicitly
prohibits state laws which either discriminate against or substantially burden
interstate commerce. For state tax laws
to be approved under these guidelines, the U.S. Supreme Court has said the tax
must:
(1) apply to an
activity with a substantial nexus with the taxing State,
(2) be fairly
apportioned,
(3) not
discriminate against interstate commerce, and
(4) be fairly
related to the services the State provides.
The reason the Wayfair case is so important is because
for 50 years no state tax that applied to out-of-state sales could get past the
first test. Previously, to meet that
first test (the company has a substantial nexus to the state levying the tax),
it had to have a physical presence in that state. In Wayfair,
a 5-4 majority of the Court decided that a physical presence is no longer
required to satisfy the substantial nexus test.
That is the important but limited decision made by the Court.
The Court did not reach a
decision on the final three factors because the underlying South Dakota courts
did not have a chance yet to evaluate those questions. So, the case goes back
to the lower courts to determine if the plan satisfies the remaining tests so
that South Dakota actually can levy sales tax against out-of-state sales.
Nevertheless, the Court made some
important observations. The majority
decision expressed concern for how interstate taxation could burden startups
and small businesses and questions whether such companies could have a
substantial nexus to the state if they do not engage in a significant amount of
commerce in the state. The Court
favorably commented on the South Dakota tax plan under review in this case –
that plan restricts the application of sales tax to out-of-state companies that
have at least $100,000 in sales per year or more than 200 separate transactions
per year with state residents. The Court
also indicated that the ease with which companies could comply with a state’s
taxing scheme would weigh on whether it created a substantial burden on
interstate commerce. South Dakota and
more than twenty other states have adopted the Streamlined Sales and Use Tax
Agreement, which is designed to make it much easier for out-of-state retailers
to comply with an Internet tax program.
Illinois has no Internet Tax Law
Second, Wayfair only addresses a
South Dakota state law. Even if the case
had gone further and approved the tax plan implemented by South Dakota,
Illinois does not have a parallel tax law.
Before Illinois can levy taxes against Internet sales it would have to
amend its current sales tax laws. As we
know, the General Assembly has a difficult time reaching an agreement on such
important issues. In addition, Illinois
is not one of the states to adopt the Streamlined Sales and Use Tax Agreement. So, before Illinois and local governments could
benefit from the holding in Wayfair,
the General Assembly would have to take action in a way which complies with the
Commerce Clause.
The Fiscal Year 2019 Budget which was adopted as Public Act 100-0587
does make amendments to the Use Tax Act and Service Use Tax Act. The amendments are designed to mimic the tax
regulations on out-of-state purchases adopted in South Dakota. Currently, the amendments only authorize the
collection of the State Use Tax and not any local use tax. The amendments are not designed to become
effective until October 1, 2018.
Nonetheless, the Illinois sales tax paradigm remains different from
South Dakota’s because Illinois is not a party to the Streamlined Sales and Use
Tax Agreement.
The Federal Government Can Preempt the Field
Third, as mentioned above, the
federal government has exclusive authority to regulate interstate
commerce. As the Court states, “when
Congress exercises its power to regulate commerce by enacting legislation, the
legislation controls.” So, the federal
government could preempt a patchwork of different state Internet tax laws by
adopting comprehensive legislation to govern the field. To-date, Congress has been unable to reach an
agreement on this issue. Various versions
of the Main Street Fairness Act, designed to place local businesses on a level
playing field with Internet businesses, have been debated for several years
with no action – the very motivation for South Dakota to adopt its plan in the
first place. Some people have speculated
that the Wayfair decision will jump
start the legislative process and result in a nationwide sales tax
program. Only time will tell.
Post authored by Adam Simon, Ancel Glink
