Wondering About Wayfair

What does the U.S. Supreme Court’s decision in the online sales tax case mean for Illinois?

South Dakota v. Wayfair, Inc. (2018) is a hot topic in tax law right now. The U.S. Supreme Court upheld South Dakota’s law requiring out-of-state sellers to collect and remit sales tax even if the seller lacks physical presence in the state. Under the law, sellers who annually deliver more than $100,000 of goods or services into the state, or engage in 200 or more separate transactions for the delivery of goods or services into the state, must charge tax on sales. So, what does this mean for Illinois?

Illinois wasted no time in following South Dakota’s lead. In anticipation of the Supreme Court’s decision in Wayfair, Illinois law was amended to mirror South Dakota’s law. The pertinent amendment begins on p. 457 of Public Act 100-587.

Unlike South Dakota’s law, however, Illinois’ explains how out-of-state sellers calculate whether they must charge tax. Retailers are required to determine on a quarterly basis whether they meet certain tests for the preceding 12-month period. If so, they must collect tax and file returns for one year. At the end of the one-year period, the retailer determines whether they continue to meet either test. If the retailer didn’t meet either test for the one-year period, the retailer is not required to continue to charge tax and file returns but remains required each quarter to make the determination.

Initially, this sounds like a bright-line test. On further examination, however, it’s not such a clear test. Although the physical presence question has been addressed by the Supreme Court, other issues remain. Let’s decode some of them.

The Illinois law becomes effective Oct. 1, 2018, so out-of-state retailers without physical presence don’t have to act until then, right? Well, no.

First, Illinois’ law establishes an “end of the quarter” test for determining nexus, but Oct. 1 is the beginning of a quarter. Does that mean retailers can wait until the end of December to determine nexus and, potentially, begin charging and collecting taxes on Jan. 1? Not according to the Illinois Department of Revenue (IDOR). Retailers were required to make determinations as of the end of September 2018 and begin collecting tax on Oct. 1 if they meet the statutory thresholds.

Second, Wayfair did not sanction the South Dakota law as the only valid nexus test. The Court cited the standards set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977): “The Court will sustain a tax so long as it (1) applies to an activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services the state provides.”

There are other provisions in current Illinois law that, while inconsistent with the old Quill Corp. v. North Dakota, 504 U.S. 298 (1992) physical presence requirement, may not be inconsistent with the Complete Auto standards. Three subsections of the statutory nexus definition deal with advertising directed to Illinois. None of these provisions require physical presence but in light of Quill were never enforced by Illinois. It is possible these provisions could now be enforced. If so, will they be enforced retroactively?

Consider item seven of Illinois’ law, which provides that “a retailer, pursuant to a contract with a cable television operator located in this state, soliciting orders for tangible personal property by means of advertising which is transmitted or distributed over a cable television system in this state.” Virtually every time I turn on my television I see commercials for Overstock and other internet sellers. Could the IDOR take the position that these retailers should have immediately after the Wayfair decision registered with Illinois and begun collecting Illinois Use Tax from Illinois customers considering this provision, even prior to Oct. 1?

Next, what will happen to “marketplace” sellers on sites like Amazon and Etsy? “Marketplace sellers” are independent companies that use Amazon and Etsy as a platform to advertise and make sales. Who will be the “retailer” for purposes of the nexus test? Illinois has yet to articulate whether such sellers will be deemed by the IDOR to have nexus irrespective of the whether individual sellers reach the statutory sales thresholds — my guess is they will be deemed to have nexus.

And what about item eight of Illinois’ existing nexus definition, which provides a seller has nexus if it is “a retailer engaging in activities in Illinois, which activities in the state in which the retail business engaging in such activities is located would constitute maintaining a place of business in that state.” In the past, enforcement of this provision was constrained by the Quill physical presence requirement. What if a retailer is “located” (assuming we can agree on a definition of located) in a state that adopts a stricter standard than Illinois — say $50,000 in annual sales and/or 100 or more separate transactions? Will Illinois invoke item eight?

In addition, I also foresee a new round of lawsuits under the Illinois False Claims Act in which the relator asserts that various provisions of the current definition bestow nexus on sellers, even in situations in which the seller hasn’t reached $100,000 in sales or 200 transactions.

The Wayfair decision also doesn’t bring complete tax parity between internet and brick-and-mortar sellers in Illinois because of how Illinois law deals with locally imposed sales taxes. Locally imposed sales taxes are, with certain exceptions (the Chicago Use Tax for Non-Titled Property and other locally imposed taxes on titled property), retailers’ occupation taxes charged and collected by Illinois retailers.

Following the Wayfair decision, internet retailers will generally charge and collect Illinois’ 6.25 percent use tax on sales to Illinois customers. For example, if, as a resident of Springfield, I decide to buy a sofa from Wayfair, I will pay 6.25 percent sales tax. If I buy the same sofa from a local retailer, I will pay sales tax of either 8.5 percent or 9.5 percent depending on the location of the retailer in Springfield. That’s still a rather large advantage for internet sellers on big-ticket purchases.

One last issue I’d like to point out involves the current Illinois statutory system for distributing a portion of sales tax revenues to local governments. Local governments are not going to see a sudden large influx of sales tax dollars because of Wayfair — 1.25 percent of the 6.25 percent Illinois Use Tax is distributed to local governments based on population, not the location of purchasers. Some local governments will likely feel that they’re not receiving their “fair share” of the new revenue.

We now know the answer to the physical presence requirement of Quill — it has been eliminated. However, there remains many difficult and likely vexing post-Wayfair questions that need to be addressed. The bottom line is there’s still a lot to decode when it comes to tax law.