The Supreme Court in South Dakota v. Wayfair last week reversed a half century of its precedent and ruled that a physical presence is no longer necessary for states to require remote sellers to collect sales or use tax on interstate sales of goods. Time will tell whether or to what extent Mississippi will experience the tax windfall predicted by many, as our statutes and regulations contain several requirements that still protect many sellers from local collection requirements even after the repeal of Quill. Perhaps more consequential, however, could be the risks this decision poses to Mississippi-based sellers now facing our sister states’ complex, inconsistent and highly expensive sales, use and even income tax requirements from which they previously were immune.
Mississippi law has long provided that remote sellers have use tax “nexus” with the state if they “purposefully or systematically” exploit the consumer market provided by this state via any media-assisted, media-facilitated or media-solicited means. Prior to the Wayfair decision, the state was constitutionally prohibited from enforcing this law against sellers lacking an actual physical presence in the state. In light of South Dakota’s and several other states’ challenges to that rule, the Mississippi Department of Revenue last year adopted new use tax regulations to prepare the state to collect these taxes in the event the Supreme Court overturned its prior decisions, but the Department postponed enforcement of that regulation until the Court ruled. Now that Quill is history, we should expect many non-Mississippi sellers to begin collecting and remitting the state’s use tax. How much new revenue that will generate is unknown.
Our current regulation, however, does not extend the obligation to all remote sellers. Only those sellers with at least $250,000 of sales into the state over a twelve-month period are required to collect Mississippi taxes, and only on a prospective basis once that threshold is met. As written, the regulation also suggests if they subsequently fall below that threshold, their obligation perhaps ceases until they once again meet that trigger.
Even with the requisite sales, sellers still must have “purposefully or systematically” targeted the Mississippi market before their collection obligation arises. The new guidance provides several examples of what the Department considers as meeting this requirement. Specific to e-commerce, the regulations include “emails, texts, tweets and any form of messaging directed to a Mississippi customer; online banner, text or pop up advertising directed toward Mississippi customers; and advertising to Mississippi customers through applications ‘apps’ or other electronic means on customer’s phones or other devices.”
The regulation does not specify what it means to direct any of these activities specifically to the Mississippi market, or how frequently those activities must occur. For example, if a seller markets generally over social media or makes email or text blasts to large nationwide distribution lists, have they specifically targeted Mississippi as such? Recent Supreme Court due process clause decisions suggest a constitutional distinction likely exists between general advertising or marketing that happens to reach someone in a state, as opposed to more targeted activities directly specifically toward someone within that jurisdiction. These questions exist under many states’ laws and eventually will have to be answered , and likely will entail a fair amount of litigation to flesh out exactly how far laws such as Mississippi’s extend. Much of this litigation could implicate fundamental due process jurisdictional considerations extending well beyond sales taxes, and could further define the reach of the state’s jurisdiction over nonresidents in a wide range of non-tax contexts.
The Wayfair majority also went out of its way to point out that even after removing Quill’s physical presence requirement, many state sales and use tax schemes could be subject to constitutional challenges under other well-established constitutional principles. The Court felt South Dakota’s statutes likely contained sufficient safeguards against retroactivity, double taxation, and uniformity challenges, but Mississippi’s system does not include many of South Dakota’s features and in the right context may eventually be tested under some on some of these principles.
The more profound local impact of the Wayfair decision may be how it affects Mississippi-based sellers who previously have been able to leverage the internet to compete against larger sellers in interstate commerce. Chief Justice Roberts, joined by liberal justices Kagan, Sotomayor and Breyer (odd bedfellows, indeed), noted that the GAO report cited by the majority stated that 87 percent to 96 percent of the top 100 online retailers were already collecting sales taxes, and that states were already collecting around 80 percent of all the taxes they would collect absent the physical presence rule. This is consistent with recent statements by Mississippi’s tax officials regarding how many large sellers are already collecting our taxes, but the true extent of the expected “windfall” is unknown.
For Mississippi’s small businesses, however, the Chief Justice highlighted the negative impact the decision could have on the ever expanding online marketplace they tend to occupy. “Correctly calculating and remitting sales taxes on all e-commerce sales will likely prove baffling for many retailers,” he explained. “Over 10,000 jurisdictions levy sales taxes, each with ‘different tax rates, different rules governing tax-exempt goods and services, different product category definitions, and different standards for determining whether an out-of-state seller has a substantial presence’ in the jurisdiction.”
The majority dismissed many of these concerns by noting that over 20 states participate in the Streamlined Sales and Use Tax Agreement, but failed to acknowledge that most of the largest states (and Mississippi) are not members of that pact. Those who regularly handle multistate sales tax issues can attest that numerous complex uniformity issues still exist even among those who do. Streamlined is nothing close to the panacea the majority purports it to be, and the Wayfair decision removes most of the states’ incentives to give up their historic practices and local fiefdoms to pursue uniformity. Many feel Congress now is even less likely to step in to pursue those badly needed reforms.
Moreover, the magical software solution envisioned by the Court’s majority is in its infancy and its capabilities and costs are highly uncertain. Ultimately, the dissent explains that sales tax compliance costs and uncertainty will push many sellers out of the market altogether, and that the Court’s decision “will surely have the effect of dampening opportunities for commerce in a broad range of new markets.” This was no understatement, and many of Mississippi’s “main street” businesses who have learned to compete nationally and internationally via the Internet will soon experience that dampening effect first hand when our sister states come knocking.
We will likely see increased revenue following Wayfair, but offsetting factors will materialize over time that may make the true impact very difficult to calculate. How many small businesses will abandon online interstate sales altogether due to these new tax compliance costs, complexities and risks? How many now will be forced to sell through larger, better established businesses having the administrative capacity to handle those multijurisdictional compliance burdens? If they do, will those middlemen pick and choose whose products they choose to sell, and how much might they cut into the original seller’s current profitability? If sales tax nexus in turn leads to new state income tax filing obligations (California, for example, has been very aggressive in this area), how much will that reduce Mississippi’s income tax collections as our residents claim credits for the taxes they will have to pay to those other states?
The entire Supreme Court seemed to agree the Quill rule was incorrect and outdated in the modern economy, but they differed sharply on whether the Courts should simply throw out a half-century old rule upon which an entire online economy had been built, or leave it to Congress to more carefully and thoughtfully craft a solution that balanced everyone’s interests. The narrowly split Court made its decision, and now we are left to figure out where that leaves both states and taxpayers going forward, not to mention how significant an impact it will have on our overall economy. It will be along and bumpy road.
JOHN FLETCHER is a tax partner at Jones Walker LLP in Jackson, whose practice focuses primarily on state and local tax issues in Mississippi, Louisiana and other states. Having worked as a state tax attorney at General Electric Company and two national accounting firms, he is a former adjunct tax professor at the State University of New York at Albany and is a frequent speaker and instructor on a wide range of state and local tax issues of national interest.
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