SOUTH DAKOTA V. WAYFAIR AND ONLINE SELLER TAXATION
In its decision on South Dakota v. Wayfair on June 21, 2018, the U.S. Supreme Court overturned a 1992 precedent that excused out-of-state retailers from collecting and remitting state sales tax when selling products to residents of a state. The seller was only required to collect sales tax if they had a physical presence such as a brick-and-mortar store or an employee within the buyerâ€™s state legal boundaries.
With the recent ruling, physical presence is no longer required for a state to impose a sales tax on sellers, and states stand to collect potentially billions of dollars in sales taxes from remote sellers. While states aim to maximize a potential windfall of new tax revenue, tribes should be exploring the impact on their sales tax collection.
In 2016, South Dakotaâ€™s legislature responded to what it declared a â€œfiscal emergencyâ€ arising from its eroding sales tax base, and passed a law requiring sellers with gross revenue from sales in South Dakota of more than $100,000 within a year, or at least 200 separate transactions in a year, to collect taxes on behalf of the state. The South Dakota Supreme Court held that legislation to be unconstitutional, and the U.S. Supreme Court granted South Dakotaâ€™s Cert Petition.
In the Wayfair decision, the U.S. Supreme Court acknowledged that brick-and-mortar stores have been at a competitive disadvantage to out-of-state sellers. And as technology has become more involved in commerce year after year, it has created incentive for states to challenge the physical presence nexus rule.
While no recent data is available on the use of Internet commerce in Indian communities, it is growing nationally for other populations. The U.S. Department of Commerce estimates that nearly 50% of all retail sales growth in 2017 was due to e-commerce.
The Supreme Court decision affirmed South Dakotaâ€™s standards as reasonable for these factors:
- South Dakotaâ€™s minimum standards ($100,000 in sales or 200 separate transactions into the state over a 12-month period) apply a safe harbor to those who transact only limited business in the state.
- It ensures that no obligation to remit sales tax may be applied retroactively.
- South Dakota is one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs. It also provides sellers access to sales tax administration software paid for by the State.
STATE COURTS ARE GOING TO BE BUSY
After Wayfair, states need no longer wait for permission from Congress to require remote sellers to collect tax. The ruling is prompting states to become more aggressive in pursuing sales tax on out-of-state businesses that do not have physical presence in the state but that sell and/or deliver into their state. Forty-five of fifty states now impose sales tax on purchases. Thirty-one have laws taxing internet sales, and sixteen of those have laws similar to South Dakota.
WHAT DOES THIS MEAN FOR TRIBES?
Tribes have the inherent sovereign power to impose taxes as recognized by the U.S. Constitution as tribal governments. Tribes and their members are exempt from state sales tax on reservation trust lands. Tribes may impose taxes, and may establish agreements with the States for the collection of taxes for transactions on their reservation lands.
For example, a Native American who is an enrolled member of a tribe and lives on the tribeâ€™s reservation purchases tangible personal property from a retailer. The retailer is located off the reservation and perhaps in another state, and delivers the purchase to the tribal member on the tribal reservation. This is not subject to any state sales or use tax. Purchases of services, such as satellite television services, are also exempt from state sales and use tax if they are provided to tribal members on their reservations.
Like states, each federally recognized Indian tribe has the power to tax sales on its reservation. In the above examples, the tribe can tax the same sales of goods and services when a retailer delivers them to tribal members living on Indian land, or to businesses located on the tribeâ€™s reservation.Â In order to do so, tribes would need to review their tax laws compared to the sales tax law in South Dakota.
Tribal governments fund and operate public services such as road systems, courts, police, schools and community centers. New tax revenues could benefit these services and enhance economic activity and tribal management over reservation lands.Â
WHAT SHOULD TRIBAL GOVERNMENTS DO?
Tribes should consider taking action to assert their sovereignty and levy sales taxes, as long as they follow the standards deemed reasonable by the Court in the Wayfair case. They will also need to monitor whether states and retailers are improperly collecting tax from exempt tribal purchasers. It may be necessary to develop exemption certificates that can be used to notify sellers.
This change provides a new or increased revenue opportunity and a path to expanding tribal community and financial health. Tribal governments should consult with their tax and advisory partners to determine the appropriate steps forward. While tribesâ€™ legal counsel generally take the lead to assist with the tax codes and agreements, state and local tax advisors can assist your legal counsel and further help with the administrative oversight, accounting, and auditing tribal tax payers to optimize tax revenue streams.
About James Ortiz: James is head of the State and Local Tax Department at REDW. He has extensive experience with a wide range of industries and tax specialties, including public and tribal governments.
About Corrine Wilson, CPA: Corrine is nationally recognized as an expert in tribal government financial management and is a member of the Ft. McDermitt Paiute-Shoshone Tribe of Nevada. She is leader of REDWâ€™s National Tribal Practice.
This REDW article first appeared in the NAFOA Navigator, Fall 2018 issue.