This article was written specifically for MICPA members examining the far-reaching impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.
In South Dakota v. Wayfair (“Wayfair”), the Supreme Court reversed decades of precedent created in Quill Corp. v. North Dakota (“Quill”), by abandoning Quill’s bright line physical presence nexus standard. The taxing powers of a state may be limited by constitutional clauses. One of these clauses, the Commerce Clause, limits a state’s authority to impose tax if the tax will burden interstate commerce.
In Wayfair, the Court noted that South Dakota’s tax system has several characteristics that may prevent undue burdens on interstate commerce. Specifically, (1) South Dakota has a “substantial nexus” statute requiring a considerable amount of business, (2) South Dakota’s law is not retroactive and (3) South Dakota is part of the Streamlined Sales and Use Tax Agreement (“SSUTA” or the “Agreement”).
This raises the question: in modeling their sales tax statutes, will states need to be part of the SSUTA in order to prevent undue burdens on interstate commerce?
The SSUTA is an agreement developed through the Streamlined Sales Tax Project (“SSTP”). The purpose of the Agreement is “to simplify and modernize sales and use tax administration and reduce the burden of tax compliance.” The SSUTA is an agreement among states to keep their tax statutes in conformity and abide by joint administrative procedures. The SSUTA is limited to the consumer use tax. The SSUTA does not override state laws. However, in order for a state to be a member, it must comply with the requirements of the Agreement.
Under the SSUTA, there are four levels of membership:
- Full member states are states that are in compliance with all provisions of the SSUTA.
- Contingent membership is where a state has made all the necessary changes to fully comply with the SSUTA but the changes are not yet in effect.
- Associate membership is where the state has achieved substantial, but not full compliance with the SSUTA.
- Advisor membership is for any state that held implementing state status before October 1, 2005 but has not become a full, contingent, or associate state member. A state may also become an advisor state by enacting legislation which authorizes the state’s participation in, or a memorandum expressing intent to participate in interstate discussions to develop a simplified sales and use tax system.
Currently, there are currently 23 full member states, including Michigan. There is one associate member state.
The overall benefit of doing business in a state that is part of the SSTP is reduced tax compliance costs, because member states use the same product definitions, sourcing rules and methods to determine tax rates. For example, the SSUTA does not allow member states to have multiple state sales and use tax rates on items of personal property or services.
However, the SSUTA does allow member states to impose a single additional rate on food, food ingredients, and drugs. The SSUTA contains uniform definitions for product and sales tax holiday definitions. For example, uniform definitions for items such as “food”, “clothing”, and “protective equipment” allow states to determine whether the same item will be taxable or exempt.
The SSUTA provides sellers with tax administration software that is paid for by the member state. Sellers who use this software are immune from audit liability. The SSUTA provides contracts for member states to reimburse Certified Service Providers. Certified Service Providers assist remote sellers in determining what is taxable and collecting their taxes. Additionally, being a member state of the SSUTA may be beneficial for states to comply with any future federal legislation resulting from Wayfair.
States that simply adopted the economic nexus provisions of the South Dakota statute, may still find themselves running afoul of the Commerce Clause. In Wayfair, the Court discussed how South Dakota’s membership in SSUTA helped prevent undue burdens on interstate commerce. There is an implication in the Court’s discussion that membership in SSUTA may satisfy the Commerce Clause.
It is unclear whether states that have similar statutes to South Dakota’s, but are not members of the SSUTA, will be found constitutionally valid. Would, for example, a specific level of membership in the SSUTA be required to find a nexus provision constitutional. In the meantime, more states may adopt the SSUTA as a way to assist businesses in complying with the new standard established in Wayfair and reduce potential litigation.