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.
Keith Staats, JD
Executive Director, Illinois Chamber Tax Institute
(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.
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
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.
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
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.