On June 21, 2018, the U.S. Supreme Court ruled in favor of South Dakota in a landmark nexus case, South Dakota vs. Wayfair, which overturned a previous law that required a physical presence within the state before the burden of collecting sales taxes could be imposed on a seller. The ruling triggered waves of sales tax rules changes across the country and introduced new layers of compliance complexity that continue to proliferate.
Wayfair’s fifth anniversary seems like a good time to reflect.
Indirect tax teams deserve recognition for adapting quickly and cost-efficiently to the avalanche of tax rule changes that occurred in the months and years following the ruling. As Vertex reported shortly after the decision, “The existing compliance burden will likely escalate significantly... By overturning Quill, companies could be required to collect and remit sales tax in up to 45 states. As a result, some companies may need to invest in new technology and processes.”
We should also commend the tax industry groups, professional organizations and public sector entities that have helped indirect tax teams make sense of Wayfair’s cascading implications. Organizations like the Multistate Tax Commission (MTC), the Tax Foundation, the State Tax Research Institute, the National Conference of State Legislatures and even the Government Accountability Office (GAO) have published valuable research, analysis and guidance on Wayfair’s numerous implementation challenges and ongoing compliance hurdles.
Now that we’re five years out, Wayfair also looks like a digital taxation milestone. The ruling’s nexus shift was largely driven by the burgeoning adoption of e-commerce – a trend that began two-plus decades ago, then was supercharged by omnichannel and customer experience breakthroughs and, more recently, the global pandemic. Policymakers still need to figure out what types of digital taxation work and which present legal challenges (e.g., Maryland’s digital services tax); the pressure to do so intensifies with each digital advancement.
As my colleague George Salis notes, “digital advertising tax legislation and rules vary, and they are sparking contentious legal battles.” George, who is Vertex’s Chief Economist and Senior Tax Policy Director, also notes that “more states are taking a hard look at the taxability of cloud computing, non-fungible tokens (NFTs) and cryptocurrencies” in his recent rundown of digital taxation.
Finally, it’s important to reflect on how sales taxes have changed in relation to other government funding sources in the past five years. The change is significant, and it will have major implications on sales tax rates and rules changes in the coming five years.
Sales taxes and other transaction taxes have become the go-to funding lever for state and local governments as a source of revenue amid a widespread move to lessen the burden of personal income and property taxes. Plus, the importance of sales tax as a public funding source is growing at a time when the sales tax base is narrowing – primarily due to a substantial increase in the adoption of exemptions by state governments. Research from the Tax Foundation indicates that sales tax breadth has declined from a mean of 98 percent in 2000 to approximately 29.52 percent today. This forces states to raise sales tax rates or add other sources of revenue. That’s why you’ll be seeing me write more about the growing use of fees – including retail delivery fees and a range of green fees – this summer.
While post-Wayfair sales tax policymaking has imposed plenty of additional complexity on tax departments, tax leaders should feel good about their teams’ responses to these challenges. They should also keep in mind that more complexity is on the way given the ongoing need for thoughtful sales tax reform.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.