What Are We Talking About?
On June 21, 2018, the U.S. Supreme Court issued its opinion in the case South Dakota v. Wayfair. In essence, the Court ruled that state and local governments can require retailers with no physical presence in the state to collect sales tax on those sales.
The Court ruled that the standard for determining the constitutionality of a state tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state; i.e., the Court threw out a previous requirement for “physical presence.”
Justice Anthony Kennedy, in the majority opinion, wrote that the previous decisions were flawed.
“Each year the physical presence rule becomes further removed from economic reality and results in significant revenue losses to the states,” he wrote in an opinion joined by Justices Clarence Thomas, Ruth Bader Ginsburg, Samuel Alito, and Neil Gorsuch. Kennedy wrote that the rule “limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
Thus, it said that South Dakota’s law was ok! Previously, if the vendor didn’t have physical presence in the state where the buyer was, there was no requirement on the business to collect the tax.
That’s an important point. It’s not that the tax was never due—what previously was supposed to happen is the buyer pays a “use tax” and pays the tax on their own, but as you might imagine, compliance is pretty poor—hence, “billions” are at stake.
Alright, but practically, how does a seller know in which state to collect tax? Is it where the seller is shipping it? Is it the billing address?
The South Dakota law was specified as “goods or services into South Dakota.” But not every state’s law is the same. And even the prestigious SCOTUSblog summarizes the impact as “goods the seller ships to consumers in the state.” That is, while much of the reporting is about the impact to “online sales,” it might not just be that, but rather thought of more broadly in terms of “shipping.” Technically. But arguably, the Supreme Court’s 5-4 split decision in June didn't really reduce any tensions, or even answer major outstanding questions. So, not exactly a real “win,” in that sense.
However, there is plenty of worry and uncertainty—while also cause for celebration from some state governments and those organizations who represent them.
And there’s certainly also panic. In the opinion of some, like U.S. House Judiciary Committee Chairman Bob Goodlatte (R-VA), the decision “has the potential to unleash chaos for consumers and remote sellers, particularly small business sellers.”
And it is not just the perhaps more fire-breathing U.S. House of Representatives saying that, but also Ranking Member of the U.S. Senate Finance Committee Ron Wyden (D-OR): “I’ll do everything I can as the top Democrat on the Finance Committee to protect Oregonians—and small business everywhere—from being harmed by this catastrophic decision.” Wyden’s Oregon is one of five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—that does not impose sales taxes at all!
What Does the Decision Mean for Artists?
It sometimes can be difficult to extract arts impact from legal decisions—and, more exactly, to know which decisions merit a closer look. A closer examination of the case certainly raises curiosity—especially since we know the arts mean business!
And that’s a reason why creative economy companies like Etsy are putting out helpful, easy-to-understand information to their sellers.
For instance, what if an individual makes an arts purchase while on vacation and has it shipped home? How does that art gallery handle the sales tax? Likely, it will remain at the point of transaction—and shipping is just a service. But if we know anything, tax treatment can cover myriad possibilities depending on state or local laws.
So what does it mean for the arts? And why is there so much interest in the decision?
First, billions of potential tax revenue is at stake. The U.S. Government Accountability Office (GAO) estimated in 2017 that state and local governments could gain from $8 – 13 billion annually, if states were given authority to require sales tax collection from all remote sellers—which this Wayfair decision may allow. That’s an average gain of about $200 million to each state (ranging from more than $1 billion in more populated states like California, to $20 million in less populated states like Vermont).
Others have put those revenue estimates far higher. For instance, the International Council of Shopping Centers estimated the lost revenue to state and local governments at $26 billion in 2015.
Some responses from the small business world included the founder and CEO of 1st in Video-Music World Inc., Dennis Boudreau, who might have the most widely held view after trying to find some clarity on how to feel about what happened: “He had read 20 news stories on the Supreme Court decision and gotten 20 different interpretations of what will happen.”
Dave “Lando” Landis of Rocker Rags, a New Mexico-based online seller of clothing with photos and logos of rock musicians, summed it up as, “It’s not something that needs to be a panic situation.”
If I’m an Artist Selling My Product Online …
Smaller businesses may see increased costs, including start-up costs, licensing fees, administrative costs, and options for premium services, such as preparing or automatically filing sales tax returns.
What could be most pivotal in the Court decision, though, is the clear shift in outcomes based on a shift in technology. The Court’s decision overturned 50 years of precedence in how some state sales tax can be collected. And, the decision will impact every business that has customers in multiple states (assuming they are not just those five states without a sales tax).
What was especially interesting was that the previous precedent was a 1992 court decision—a decision that came down before both Amazon (founded in 1994) and eBay (1995) existed. And in fact, those “technological advances” were part of the argument and sway—and a strong factor for why South Dakota deliberately passed a law in direct conflict to the Court’s 1992 ruling—to challenge that ruling and build litigation.
Further, as can be the case with split decisions, the weight of the ruling might feel less unanimous, but in fact, it really was a clear ruling. The dissent was mostly not on the merits, but on who should be deciding—i.e., the justices dissented with the argument that Congress should be passing laws. As Chief Justice Roberts wrote in his dissent:
E-commerce has grown into a significant and vibrant part of our national economy against the backdrop of established rules, including the physical-presence rule. Any alteration to those rules with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress. The Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.
Art galleries also are taking a close look. The international law firm Withers LLP shared to clients that “this new development may negatively affect New York art merchants, who often arrange shipments of out-of-state deliveries using fine art carriers. As a result, when New York merchants control the shipment of artwork outside of New York, they now must consider whether they are inadvertently exposing themselves to the sales tax withholding requirements of other states.” Tax evasion of sales tax on artworks has been a concern in the past for New York City prosecutors.
How Are States Responding?
How various states are responding is part of the navigation challenge.
In New Hampshire, the state legislature in this “Live Free or Die” state came back into a special summer session in July to try to make it more difficult for states to collect tax on New Hampshire consumers. Items on the legislative docket included requiring out-of-state tax collectors to register with the state Attorney General, pay a fee, and prove the tax is constitutional.
According to the Tax Foundation, “Some states will move quickly to enact laws resembling South Dakota’s to collect sales tax on internet purchases. Other states would need to make significant changes to their sales tax system to be able to collect, particularly large states that have resisted joining other states in adopting more uniform, simplified sales tax laws. Some states, such as New Hampshire, will likely never pass a sales tax.”
Kentucky’s Department of Revenue adopted a South Dakota copycat law in July; Arkansas’ tax agency is asking its legislature to do the same; and Nebraska will now require “remote retailers” to obtain a sales tax permit and beginning collecting taxes at the start of 2019. Many more states will be considering their response—money is on the table.
For the creative economy, there is a lot to be revealed in how artworks, crafts, and creative products might be treated, favorably or unfavorably, through the anticipated state tax changes. In Pennsylvania, for example, sales of yarn are subject to tax, but not if the yarn is for use in clothing. In Rhode Island, clothing typically is exempt, but not costume masks sold separately, buttons, lace, or patches! In sum, how products are classified could significantly change their tax treatment.
The Multistate Tax Commission, “an interstate tax organization that tries to shape state tax activity via model legislation,” has urged Congress to leave the issue to states, though the National Conference of State Legislatures passed a resolution July 30 urging Congress to step in.
Even before the decision, it was a patchwork of laws. There are upwards of 10,000 tax jurisdictions in the United States.
The Tax Foundation has even put together a map—not surprisingly, New Hampshire has zero, but Texas comes in with almost 1,600! Even a geographically smaller state like Iowa has over 1,000 (see below).
Leave a comment below if you have specific concerns or are seeing impact. Part of the complexity of this ruling is that states are all responding in different ways—and Congress might, too!