South Dakota v. Wayfair, Inc.: A win for marketplace fairness, an open path for Arkansas
By Lindsey Bailey, AAC General Counsel
On June 21, 2018 the Supreme Court of the United States issued an opinion in the landmark case, South Dakota v. Wayfair, Inc., Et. Al., making it clear that, if certain criteria are followed, states may legally require out-of-state companies to collect and remit state and local sales tax on online purchases, so long as they maintain a “substantial nexus” within the taxing state. Lawmakers and in-state retailers have argued in years past that out-of-state companies that do business in Arkansas were receiving an unfair advantage by not having to collect and remit sales taxes on online sales that companies with an in-state physical presence are required to collect. The Wayfair decision places Arkansas in a very favorable position to begin the enforcement of sales tax collections on online sales from out-of-state retailers.
In 2017, former Arkansas State Sen. Jake Files sponsored Senate Bill (SB) 140, co-sponsored by Rep. Dan Douglas, along with Senators Dismang, Teague, Sample and Rapert, that would have required the collection and remission of sales taxes to the state from out-of-state retailers that on an annual basis either exceeded gross sales receipts of $100,000 or sold and delivered goods into the state through at least 200 transactions. It is worth noting that individual tax-paying Arkansans are already required by law to report sales taxes owed on their online purchases on their individual state income tax returns. However, the reporting process is cumbersome and very few Arkansans have complied with this requirement. SB140 would have required out-of-state companies that meet the substantial nexus requirements to collect sales taxes on their internet sales from Arkansans, and relieve the burden of individual reporting. With official endorsements from both the County Judges Association of Association as well as the Arkansas Association of Quorum Courts, the bill passed in the Senate, passed out of the House Revenue and Taxation Committee, but failed to pass on the floor of the House of Representatives with 43 Yeas, 50 Nays, and 7 not voting.
One of the primary arguments in opposition of SB140 was that the bill was unconstitutional under current federal law, based on United States Supreme Court precedents, National Bellas Hess, Inc. v. Dept. of Revenue of Ill. (1967) and Quill Corp. v. North Dakota (1992), which required a company to have a physical presence in a state before the state could enforce its collection of sales taxes. SB140 died at sine die adjournment of the 91st General Assembly on May 1, 2017. South Dakota’s bill nearly identical to SB140, S.B. 106, did pass in 2016 and was challenged in court by a group of large online retailers, led by Wayfair, Inc. S.B. 106 also required a substantial nexus of either $100,000 in gross sales or over 200 transactions of goods sold and delivered in the state.
Technically, the Supreme Court did not uphold S.B. 106, but remanded the case back to the South Dakota Supreme Court, stating that Bella Hess and Quill were overruled, and that the South Dakota Supreme Court should re-evaluate the law under the standard of “whether the tax applies to an activity with a substantial nexus with the taxing state.” The U.S. Supreme Court went even further to direct the lower court that “Here, the nexus is clearly sufficient.” Arkansas, a party to the Streamlined Sales and Use Tax Agreement, like South Dakota as noted by the Court, currently sits in a good position to pass a bill like SB 140 in the 92nd General Assembly, which convenes in January 2019.
The Arkansas Department of Finance and Administration (DFA) has pointed out at meetings of the Tax Reform and Relief Legislative Task Force that Amazon, along with several other online retailers, are already voluntarily registered and paying Arkansas sales tax under the Streamline Sales and Tax Use Agreement, having signed on in anticipation of the Wayfair decision. As a result, projections regarding the increase in revenues that a bill like SB140 would bring have become more conservative. According to DFA, the state has already collected over $100 million from voluntarily registered online retailers. By DFA’s projections, enacting a law like SB140 to compel other qualifying online retailers to collect would bring an additional $35.3 million in estimated revenues to state and local governments combined. This is still a significant amount of sales tax revenues that are rightly owed to the state and local governments, and county and district elected officials will need to remain vigilant in their advocacy for online marketplace fairness. With the U.S. Supreme Court paving the way via South Dakota v. Wayfair, the path to marketplace fairness is more attainable than ever before, and Arkansas certainly should not be left behind.