Three Years of South Dakota v. Wayfair: Local Tax Issues

This is part four of our series on how the South Dakota v. Wayfair decision has changed the landscape for businesses over the past three years. To get caught up, check out: Part I on major challenges and the future of nexus; Part II on the cost of compliance for businesses; and Part III on marketplace nexus; and Part V on audit trends.

Thirty-eight states permit local jurisdictions to impose taxes. The authority of local jurisdictions to impose taxes varies state to state as well as the purpose of the taxes imposed. You may see local taxes for counties, cities, school districts, tribal lands, special purpose districts, and beyond.

Local tax laws and procedures often do not mirror state sales and use tax laws and procedures. Many local jurisdictions have different exemptions, tax bases, and required forms than those of the state. These differences increase the complexity of compliance for businesses.

Managing local tax requirements hasn’t gotten any easier post-Wayfair and has spurred a lot of confusion for taxpayers. Many companies have had to take a fresh look at their local tax obligations as certain local jurisdictions believe they have the authority to impose their own economic nexus standard.

Recent survey results from our Sales Tax Institute audience about their post-Wayfair experiences brought to light just how challenging local taxes can be in the new sales tax environment. To dive deeper into these challenges and learn how states are addressing local tax complexities, we caught up with sales tax experts, Jordan Goodman, SALT attorney at HMB Legal Counsel, and Diane Yetter, President and Founder of the Sales Tax Institute.

Local Tax Challenges

Three years post-Wayfair, state governments have laid out their positions on economic nexus. Positions at the local level lack clarity. Survey respondents highlighted that some of their largest post-Wayfair struggles are understanding local requirements and getting registered in local jurisdictions if they find they have a collection requirement. “Home rule” states that allow local authorities to enact and administer their own general sales and use taxes are causing particularly acute headaches for businesses post-Wayfair. “We are struggling with nexus requirements for Colorado home rule jurisdictions,” Kathleen Gage of DVL Group Inc. said. “It is difficult to determine if economic nexus is $100,000 or less for home rules. Each one is different and confusing!”

Jordan Goodman on the necessity for local jurisdictions to clarify their post-Wayfair positions

Local jurisdictions need to step up and give businesses guidance as to whether they plan to follow their state-level economic nexus guidelines or if they plan to adopt their own Wayfair standard. The most pressing question is whether home rule locals can meet the constitutional challenges laid out in the Wayfair decision if they continue to self-administer their local tax.

There may be some relief on the horizon as some home rule states like Colorado and Louisiana move to centralize their sales tax collection systems.

Home Rule Responses to Wayfair

Home rule states have local jurisdictions that operate on their own in the same manner as a state department of revenue. The four primary home rule sales tax states are Alabama, Alaska, Colorado, and Louisiana. Each has taken its own approach to managing sales tax requirements for remote sellers, including the introduction of new remote seller registration authorities.

Alabama

Even before the Wayfair decision, Alabama took steps to simplify compliance for remote sellers by establishing its Simplified Sellers Use Tax (SSUT) program. The program allows eligible sellers to collect, report and remit a flat 8% sellers use tax on all sales made into Alabama effective October 1, 2015.

A separate registration is required for the SSUT program, but once accepted, sellers will not have to separately register or file with the home rule localities. This is a large administrative relief.

In order to be eligible, you cannot have physical presence in the state. However, inventory in a third-party warehouse will not constitute physical presence in Alabama.

Alaska

Alaska does not have a state-level sales tax, but it does authorize local taxes. To take advantage of tax revenue from online and remote sales post-Wayfair, Alaska created a centralized entity to administer the Alaska local tax for remote sellers: the Alaska Remote Seller Sales Tax Commission (ARSSTC). Sellers are only required to collect tax for localities that have elected to participate and have passed the appropriate legislation. The measurement for when a seller has established economic nexus in Alaska is based on total sales into the state – not locality by locality.

As of July 2021, there are 36 participating local jurisdictions for general retail sales tax as well as six for alcoholic beverage sales tax. There are seven additional jurisdictions working to adopt the uniform code to become a member jurisdiction of the ARSSTC.

For sellers with a physical presence in Alaska, direct registration is required in the locality where physical presence is established.  However, these sellers can still participate through ARSSTC for all other participating localities.

Colorado

Colorado is a state that was specifically called out by survey respondents in open-ended questions five times for being a particularly difficult state to understand and manage local requirements. This aligns with the Council on State Taxation’s “F” grade for Colorado in its 2018 “Best and Worst of State Sales Tax Systems” scorecard evaluating sales tax simplification and uniformity.

Good news! The Colorado sales and use tax system is undergoing reforms with the goal of simplifying compliance requirements with the introduction of the new Sales & Use Tax System (SUTS). Simplification efforts that began in 2017 ramped up following the Wayfair decision with a task force and coalition that involved diverse stakeholders (legislators, local government officers, businesses community representatives, CPAs). The SUTS System is a one-stop portal that allows taxpayers to find all sales tax rates associated with a specific destination and file a single remittance that goes to multiple jurisdictions.

Colorado’s H.B. 1240 in 2019 established economic nexus, destination sourcing, and marketplace facilitator requirements. However, these provisions did not apply to home rule authorities. For home rule localities to enforce economic nexus for their locality, they must pass legislation to conform with the state-level Wayfair provisions and most experts believe they must also elect to participate in the SUTS System.

Forty-eight Colorado home rule jurisdictions have opted in to join the SUTS System as of July 2021 and four additional jurisdictions are coming soon. It is expected that most, if not all, of the home rule cities will join SUTS, which would then require remote sellers to collect all the home rule local taxes. The target date of July 1, 2021, for full participation has passed, however there is hope that all 70 home rule authorities will be on board in SUTS before the end of 2021. Until that time, uncertainty remains as to whether collection is required in the participating home rule authorities for sellers who have not converted to the SUTS system.

Louisiana

Post-Wayfair, Louisiana established the Louisiana Sales and Use Tax Commission for Remote Sellers to serve as the sole entity in Louisiana to collect and remit sales and use tax from remote sellers. All localities participate and tax is remitted directly to the Commission instead of the Louisiana Department of Revenue. This system replaces the Direct Marketer Registration classification that was in place which allowed remote sellers to voluntarily register and collect a flat 8.45% rate on sales into the state. This option has been eliminated for any seller who exceeds the $100,000 or 200 transaction economic nexus.

Effective as of July 1, 2020, remote sellers are required to collect all home rule taxes at full rates and follow local taxability rules. Previously, remote sellers could collect and remit sales and use tax at a combined flat rate.

Big news currently in the Louisiana legislative pipeline is new legislation that would further consolidate all Louisiana local tax filings. H.B. 199 (Act No. 131) of 2021 proposes a constitutional amendment to establish the State and Local Streamlined Sales and Use Tax Commission that would provide streamlined electronic filing and remittance of sales and use taxes imposed by all Louisiana taxing authorities and ensure prompt remittance of returns and monies to each taxing authority. Duties of the Louisiana Sales and Use Tax Commission for Remote Sellers would be transferred to the new Commission. Louisiana voters will have the opportunity to cast their ballots on October 9, 2021, to vote on this proposed amendment. If passed by voters, it will allow legislature to authorize statutory sales tax provisions with a two-thirds vote.

For many remote sellers, these simplification measures can’t come soon enough for Louisiana’s infamously complex parishes (counties). “Locals are making this [tax compliance] tough,” said survey respondent Debbie Thole of Fossil, Inc., “like in Louisiana Parishes, we now have 64 more returns.”

Other Local Tax Responses to Wayfair

Non-home rule states and jurisdictions have also taken steps to simplify compliance for remote sellers at the local level.

Texas

Following the Wayfair decision, Texas made the decision to introduce a single local use tax rate as an alternative local tax rate for remote sellers with no physical presence in the state. Remote sellers can use this flat rate instead of collecting and remitting the total local tax in effect at each of their customer’s destination address. Currently, the single local use tax rate is 1.75% resulting in a flat 8% rate and the updated annual rate is published by January 1 of each year.

Remote sellers must notify the Texas Comptroller of their intent to use the flat local use tax rate in writing using a specific form. This flat rate is not available to marketplace facilitators.

City of Chicago

The City of Chicago issued an informational bulletin on January 21, 2021, announcing that it will impose economic nexus on a prospective basis, beginning July 1, 2021. This policy applies only to non-possessory computer leases under the Personal Property Lease Transaction Tax and streaming amusements under the Amusement Tax. The bulletin notes that Chicago is a home-rule jurisdiction with the power to require a seller outside of its boundaries that does business within its boundaries to collect its taxes.

The City has established a safe harbor for remote sellers of less than $100,000 in revenue from Chicago customers during the most recent four calendar quarters. Remote sellers under the threshold are not required to collect Chicago’s amusement tax on amusements delivered electronically, such as streaming, or the personal property lease transaction tax for nonpossessory computer leases. Sellers that exceed the threshold could be liable for these two types of taxes prior to July 1, 2021.

If the safe harbor does not apply to an entity, there are a variety of other factors the City may consider in determining if nexus is established such as employee activity, physical presence, and advertising. The City will determine nexus facts on a case-by-case basis.

Wrapping Up

Uniformity among local jurisdictions in a state when it comes to imposing taxes on remote sellers relieves some of the “undue burden” on taxpayers that Wayfair legislation is designed to prevent.  Efforts to use the same tax base among localities, simplify rates, and create a single point of registration and administration are steps in the right direction.

“I think the hardest thing is that each states requirements are so different as far as registering and filing. Some states are only one return, while other have you filing individual returns for localities. It would be nice to have everything the same across all states.” – Survey Respondent

Post-Wayfair requirements will continue to unfold at the local level and sellers with growing economic and physical presence across the states cannot afford to tune out. Rest assured that the Sales Tax Institute will continue to monitor developments in this area so you can stay ahead of the curve for local tax compliance.