Have Home Rule Jurisdictions Made the Burden of Managing Sales and Use Tax Too Much?

Have Home Rule Jurisdictions Made the Burden of Managing Sales and Use Tax Too Much?

As if managing sales and use tax obligations on a multi-state level wasn’t hard enough, some states make it even tougher with “home rule,” where jurisdictions are granted the authority to pass their own, additional tax laws. This can create deep confusion for businesses with no physical presence in a jurisdiction with these rules.

Home rule state sales tax jurisdictions have been around for years, but only since the Supreme Court’s decision in Wayfair in 2018 have these jurisdictions been able to mandate sales tax collections for remote sellers. Many states include home-rule jurisdiction adjustments, but some of the more confusing ones are Alaska, Louisiana, and Colorado, among others.

One of the tougher states

Colorado has always been one of the more difficult states when it comes to managing sales tax. In Colorado, home rule jurisdictions can set both their own sales tax administration and their own sales tax bases – potentially increasing registration, filing, and remittance deadline burdens on remote sellers. More than a third of municipalities in the state are home rule municipalities, with most of those having their own tax administration. For example, Colorado does not tax Software-as-a-Service (SaaS), but certain local jurisdictions, including Denver, do tax SaaS. (See here how confusing Colorado home rule and sales tax obligations can get.)

Another Wayfair Case?
Lakewood, Colorado, recently claimed that Wayfair LLC owed tax, interest and penalties on sales to customers in the city between May 2018 and July 2021. Wayfair countered that:

• requiring Wayfair to collect Lakewood’s sales tax during the tax period imposes an undue burden on interstate commerce because neither the city nor the Colorado’s executive director of taxation “provided a single statewide system of tax administration for all state and local taxes.”
• applying Lakewood sales tax to Wayfair discriminated against interstate retailers in violation of the Dormant Commerce Clause of the Constitution by treating out-of-state retailers differently from retailers physically in the district in question, who could charge a lower rate of tax; applied a different sourcing rule to their sales than applied to sales by businesses located in the city; and applied a definition of “Engaged in Business” that treats out-of-state retailers differently from similarly situated in-state retailers;
• Wayfair was not “Engaged in Business” in Lakewood under either legal precedent or city ordinance; and
• Wayfair lacked substantial nexus with Lakewood under the former governing “physical presence” legal standard.

“Substantial uncertainty currently exists regarding to what extent remote sales taxation is legally permissible for states and localities,” reads the U.S. General Accounting Office’s 2022 report on remote selling. “Uncertainty exists regarding what connection (or nexus) a business must have with a state before the state may require the business to collect sales taxes on its behalf; when remote sales tax requirements violate the Constitution’s prohibition on state laws that discriminate against or impose an undue burden on interstate commerce; and under what circumstances locally administered remote sales tax requirements are constitutionally permissible.”

The Wayfair/Lakewood case has been dismissed with prejudice, with both parties left to cover their own costs. Are home rule/online retailer cases likely to stay few and far between? Probably not. But is it likely that changes will be made, also probably not.  Sales tax continues to be complex, be sure you have an expert monitoring all the changing rules surrounding sales and use tax in order to keep you compliant. 

Let TaxConnex manage the burden of keeping up with all the changes and challenges that come with staying compliant in this post-Wayfair world. Contact us to learn what it means when sales tax compliance is all on us.