Back taxes for online sales?
The tax landscape for online sales just got more confusing — again.
Despite signing on to a U.S. Supreme Court amicus brief stating otherwise, California is now retroactively seeking sales tax from out-of-state online merchants, going back as far as 2012. The move is seen as a bellwether, as other states are watching to see how California fares.
To further complicate matters, while the states did sign an amicus brief, the Supreme Court’s Wayfair ruling didn’t say, explicitly, that states could not impose a retroactive tax collection for online sales. Not only do third-party sellers have to navigate the compliance complexities of the current landscape, but may now be required to remedy old transaction taxes.
“California said they wouldn’t apply the sales tax retroactively, then they turned around and did,” said Michael Bernard, chief tax officer at Vertex Inc. “They’re doing the same thing that South Carolina did to Amazon, and Louisiana did to Walmart, running the same play out of the same playbook.”
“There are some differences, but they are essentially the same,” he said. “These states have the determination that they would go back to pre-Wayfair and would make facilitators collect tax from third-party sellers using their platform.”
“The Wayfair decision allowed states to require remote sellers that exceed a certain economic threshold to collect tax destined for that state,” he said. “What California, South Carolina and Louisiana are doing is to go back into pre-Wayfair territory where the test was physical presence. They’re relying on legal theory such as agency, bailment or consignment to impose sales tax responsibilities prior to Wayfair.”
This is concerning, because of the lack of notice and a violation of the principle of fundamental fairness, according to Bernard.
“Prior to Wayfair, the law of the land was the 1992 Supreme Court decision in Quill,” he said. “Now they’re coming back to collect on transactions that were closed three to six years before Wayfair. The amicus brief, filed by every state that has a sales and use tax, said that retroactivity was not an issue because they would only apply the tax prospectively.”
In their brief, the states wrote, ”Defenders of the physical presence rule often cite the possibility of retroactive tax liability if Quill is abrogated. But those questions are not presented in this case. By its terms, South Dakota’s law is prospective in operation only; imposing retroactive tax liability is prohibited and an injunction bars enforcement of the law while the instant case remains pending. Because of these features of South Dakota’s law, any holding by this court abrogating Quill will not apply retroactive tax liability on respondents [Wayfair Inc., Overstock.com Inc., and Newegg Inc.]. Their tax liability, if any, will be on a prospective basis only. South Dakota’s law thus removes the retroactive-tax-liability issue from this case.”
Bernard cited the fact that the Multistate Tax Commission recently issued a white paper dealing with marketplace facilitators. “One of the issues they did not take up was the issue of retroactivity,” he said. “They probably felt that it did not need to be addressed because the states would not impose a retroactive tax. In fact, the opposite is occuring.”
In both South Carolina and Louisiana, the government has won lower court decisions that validate the retroactive application of the sales tax on remote sellers, Bernard indicated. “There hasn’t been a case yet in California,” he said. “So far, the state has issued directives to remote sellers.” He expects that once the state picks out a facilitator to go after, there will be legal proceedings.
Bernard’s advice to smaller sellers is to not try it alone: “The most advantageous way for the small seller to meet the compliance requirement in a post-Wayfair world is to get on the platform of a facilitator, or actually procure your own cloud-based solution,” he said.