The South Dakota v. Wayfair, Inc. Supreme Court decision was rendered on June 21, 2018. The Court’s 5–4 majority decision overturned Quill by ruling that the physical presence rule was “unsound and incorrect” in the current age of Internet services. This decision will impact thousands of out-of-state (OOS) sellers. Although most states have already set effective dates and sales thresholds, Texas has not.
So what does this decision mean for Texas? Will changes in Texas be retroactive? Will the decision apply to all taxable products AND services? What will be the requirement to report threshold? And what about all those pesky local taxing authorities? I will try to answer these questions below.
Could Congress Order All States to Follow Uniform Rules?
Although the Supreme Court has made their decision, they remanded the case for further proceedings. This means the case is not completely final. This may have to do with the fact that OOS sellers could find it too confusing to keep up with each state’s nexus requirements, sales thresholds and local tax jurisdiction collection requirements. In addition, there may be other litigation on the question of when a state or local jurisdiction can require OSS sellers to collect and remit sales and use taxes.
One possibility is that Congress could seek to establish unified rules for both the sales threshold and local jurisdiction requirements. Another possibility is for states to voluntarily subscribe to a uniform multistate model.
In Wayfair, the Supreme Court looked favorably on the fact that South Dakota had joined with 20 other states in the Streamlined Sales and Use Tax Agreement (SSUTA) to reduce economic nexus compliance burdens. The Streamlined Sales and Use Tax Agreement provides for, among other things, uniform definitions of certain products and services, simplified tax rates and immunity from audit liability for sellers that utilize sales tax administration software paid for by the state members.
As of today, Texas is not a member of the SSUTA. The Texas Comptroller made a point to state that Texas could only become a member through legislative action. Even if Texas were to join the SSUTA, this would not fix everything. One problem is that states can exempt different items. In addition, the SSUTA still requires the collection of varying local tax rates. For example, the SSUTA definition of “food” has been interpreted differently by different states.
What About Local Tax Collection Obligations (other than the state rate of 6.25%)?
This is a difficult question. Texas has over 1,500 city and local tax jurisdictions (i.e., Mass Transit, County, City, County, etc.). Currently, if you do not have a place of business (POB) and you sell from outside of Texas to a Texas customer, then you would have to: 1) collect and report the Texas 6.25% State Sales Tax rate and (2) collect the additional local jurisdiction taxes that apply to the purchaser’s ship to location.
Collection of local taxes could be a burden on the smaller, out of state (OOS) sellers that still meet the threshold. However, the OOS seller could use (any possibly pay for) software which would calculate the local taxes due based on the ship to address (and possibly zip code).
Another possibility is that Texas could simply require a flat local tax in addition to the state rate of 6.25%. This flat jurisdiction rate could be up to 2% since that is the maximum State and Local Tax rate for Texas. If this option was chosen, then there would be some method to distribute all these ‘gross’ local taxes to the various authorities such as population.
What is the Sales Threshold for Texas?
The South Dakota v. Wayfair, Inc. Supreme Court case revolved around the South Dakota Act.This act set a specific sales threshold for out-of-state sellers. More specifically, the South Dakota Act applied to: “sellers that, on an annual basis, deliver more the $100,000 of goods or services into the state or engage in 200 or more separate transactions for the delivery of goods or services in the state.”
Although most states have already declared a sales threshold of $100,000, the same as South Dakota, Texas has not yet made a decision. Notably, the Texas Comptroller announced in a press release that Texas will establish some its own requirements for out of state sellers selling into Texas. If we had to guess, Texas Comptroller will use the threshold of $100,000 in yearly sales or 200 annual transactions.
It is very likely that the legislature will amend the definition of “seller” and “retailer” in Tax Code § 151.008 (“Seller” or “Retailer”) to include marketplace platforms used by third-party sellers and provide adequate liability protection for the marketplaces that collect and remit for those sellers. Regardless, the Texas Comptroller could, prior to legislative action, compel out of state (OOS) sellers to begin collecting Texas sales taxes under Tax Code § 151.107(a)(5) (Retailer Engaged in Business in the State) as long as they give appropriate notice.
It is also possible that the legislature could amend Tax Code § 151.059 (Fee Imposed in Lieu of Local Sales and Use Taxes), which currently allows a nonresident (remote) seller to pay a fee based on a weighted average for the local sales and use tax rate in lieu of collecting local sales and use tax based on actual local tax rates. It should be noted that this statute currently only applies to a change in collection responsibilities based on the passage of federal legislation, not to changes in federal law based on a court case such as Wayfair.
And finally, the legislature could amend Tax Code § 151.107(c), a companion provision to § 151.059. If federal legislation passes, this statute would impose the collection responsibility on a seller’s tangible personal property, but not their taxable services. In other words, services may be exempted from taxation unless sold by OOS with traditional nexus factors.
When Will Out-of-State Tax Collection Laws Go Into Effect in Texas?
Each state will decide (or attempt to decide) whether their sales tax collection rules will be retroactive. It is doubtful that Texas will attempt a retroactive application of this Supreme Court decision. In fact, the Texas Comptroller, Glenn Hegar, stated that the new Texas laws would NOT be retroactive in the press release on June 27, 2018.
Base on the press release, we, expect the Texas Comptroller to enact emergency amendments to the existing and applicable Tax Rules. It is possible the agency will select January 1, 2019 as the effective date for OOS sellers to begin collecting Texas sales tax. It should be noted that the Comptroller has the power to amend tax rules with or without legislative input.
It is expected that the Comptroller’s Office will announce the effective date shortly. The date to begin collecting Texas Sales Tax will most likely be further supported by the Texas Legislature’s final tax bills. Texas legislators can begin to file bills Nov. 12 in advance of the next regular session, which begins Jan. 8, 2019.
In conclusion, there is a lot more to come on this subject regarding Texas. Texas Tax Group will continue to monitor the issue and release information as it becomes available.