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Can states apply sales tax retroactively?

It has been nearly two years since the passing of the Wayfair Supreme Court case which turned the sales tax world on its head. Yet, businesses are still muddying the waters to determine if and how the economic nexus rules apply to them. For states, the holding was somewhat of a windfall, as companies throughout the world may now be required to remit sales taxes when they never have been required before. And a few states are seeing just how much new revenue they can generate by retroactively applying the holding of Wayfair.

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After Wayfair, states put in “economic nexus” laws that required remote sellers to collect and remit sales tax after hitting certain revenue or transaction thresholds. New laws were also made that targeted marketplace facilitators, sites like Amazon, Walmart, and others. Marketplace facilitators make it possible for smaller retailers—third-party retailers—to reach a bigger audience without the need for a sales platform of their own. As with the economic nexus laws, the marketplace facilitator laws typically have revenue or transaction thresholds.

California

California’s marketplace facilitator law, which went into effect Oct. 1, reads “A marketplace facilitator that is registered or required to be registered as a retailer with the California Department of Tax and Fee Administration (CDTFA) will generally be responsible for paying the sales tax or collecting and paying the use tax on all retail sales for delivery to California customers facilitated through its marketplace.”

California was ahead of the curve, however. In 2011, the state advanced a bill intended to collect sales tax from online retailers in the state. The original bill, AB-153, eventually died in large part due to objections from Amazon. But a year later, the facilitator giant reached a deal with the state to start charging sales tax. California has used this as justification to start aggressively pursuing third-party merchants for sales taxes back to 2012.

In the summer of 2019, Governor Newsom signed a provision to limit California from demanding sales tax from out-of-state merchants for the past three years. While many believe this is unjust and that all sales tax collections in light of Wayfair be applied prospectively, the controversy continues on.

South Carolina

In September 2019, the South Carolina Administrative Law Court sided with the South Carolina DOR, finding that Amazon owed over $12 million in uncollected taxes, penalties, and interest from third-party sales covering the first three months of 2016. Amazon began collecting sales tax in South Carolina in 2016, but only on its own sales, and not for third-parties. Amazon will appeal this ruling.

Louisiana

Louisiana’s high court found for Walmart in January 2020 when it ruled that Walmart did not owe taxes from years prior to Jefferson Parish, which claimed Walmart had avoided paying ecommerce sales taxes on transactions involving out-of-state sellers. This was a great win for all market place facilitators as other states watched from afar.

Considerations

While it is often argued that the intent of the Wayfair decision was to be applied prospectively and that the previous law of the land requiring physical presence was controlling until the holding in Wayfair, the Supreme Court did not explicitly say that the states could not impose a retroactive tax collection.

Outside of the states discussed above, seven states and D.C., either intentionally or by omission in drafting, potentially require a remote seller to collect and remit sales tax for transactions which occurred prior to attaining the state’s threshold. Since there would be no way for the retailers to go back and collect the tax, the burden would fall on the retailer.

Consult with a tax advisor that has experience handling state income tax matters to make sure your business stays compliant. For any questions or concerns, please contact Brian Ess, J.D., Supervisor; BrianE@hhcpa.com; (480) 483-1170.

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