Two recent state courts’ determinations – one good for the seller, one not – show the continuing reach of Wayfair almost five years after the landmark Supreme Court decision regarding economic nexus.
The Massachusetts Supreme Judicial Court has reportedly upheld a state Appellate Tax Board decision in favor of an auto parts retailer who challenged efforts to retroactively collect online sales taxes.
At issue was abatement of a retroactive tax bill that the state Department of Revenue sought to collect from U.S. Auto Parts Network under a 2017 regulation.
The California-based company was assessed a $60,139 tax bill under the regulation that requires out-of-state internet retailers making at least $500,000 in Massachusetts sales over the internet, including 100 or more transactions, to register for, collect and remit sales/use tax. Prior to Wayfair, the Department did not characterize its approach as economic nexus, instead taking the position that cookies and apps in the state establish a physical presence. Massachusetts has since implemented a true economic nexus standard of $100,000 in gross sales.
The tax bill was later abated by the appellate board, but the state appealed that ruling, news reports said.
Lawyers for the company claimed the tax bill was being levied a year before the Wayfair decision and that they didn’t receive enough notice that officials were applying the high court’s ruling retroactively. The New England Legal Foundation filed a brief in support of the company’s fight and claimed that the state’s decision to retroactively tax online sales is unconstitutional and “exposes remote online retailers to a new tax liability that did not exist” prior to the 2018 U.S. Supreme Court ruling.
Massachusetts reportedly relied on “cookies” stored on a computer or smartphone by websites effectively created physical presence. State revenue officials have also told news outlets that some $200 million a year is lost to online sales. The state does ask taxpayers to self-report online spending, “but analysts say enforcement is almost nonexistent,” reports said.
In North Carolina, the state Supreme Court upheld a sales tax assessment against a Wisconsin-based printer, rejecting the taxpayer’s argument that they could not be subject to sales tax under the U.S. Supreme Court decision McLeod v. J.E. Dilworth Co.
The 1944 ruling in McLeod created a distinction between sales tax and a use tax in interstate commerce, defining sales of goods that occurred outside of a state that were delivered into the state via common carrier as out-of-state sales that could not be subject to sales tax under the Commerce Clause. In a companion case, General Trading Co. v. State Tax Comm’n, the court clarified that a use tax could be required to be collected in similar circumstances, as the tax was on the in-state consumer’s use of the product rather than on the out-of-state sales.
The printer argued they delivered their sales from out of state to a common carrier, and because the assessment on the business was for sales tax, the assessment was invalid under McLeod.
In their decision, the NC Supreme Court compared McLeod to more recent sales and use tax cases relating to interstate commerce, including Wayfair. The court determined that both the four-prong test established in the economic nexus standard established by Wayfair and another case contradicted the 1944 rulings.
The state’s decision also clarified that, because both the state’s sales and use tax are based on the destination at which the purchaser takes ownership of the property sold, the imposition of sales rather than use tax on out of state sellers fulfilled the four-part test.
Noted the Sales Tax Institute in its report of the case, “When some states have different rates, rules, and exemptions for sales and use tax, understanding how to properly collect and remit tax when making a sale into another state can rely on taxpayer interpretations of these concepts.”
If you think your business may be impacted by sales tax developments (not to mention tax authorities’ “interpretations”), contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.