The recent 5-4 Supreme Court decision in South Dakota v. Wayfair, Inc. has inspired concerns about how it may lead to states taxing travel agent services provided by agents in other states.
In the short term, the answer is that there will be little impact, simply because most state/local sales/use taxes do not apply to travel agent services. There are, however, continuing storm clouds on the horizon. The decision may inspire states/localities to resume their efforts to add travel agent services because the new opinion takes away the “nexus” argument that has been a major element of the resistance to imposing the taxes on remote sellers.
ASTA has already issued a statement indicating its awareness and intention to lead the resistance to such moves. ASTA and other industry groups have been actively, and for the most part successfully, opposing state/locality efforts to extend sales taxes to travel agency services. I will try to explain how the Court’s decision may affect that work, using as little legalese as possible.
The dispute in the Wayfair case was whether an out-of-state seller can be required to pay a state’s sales tax. The answer depended on the interpretation of part of the Constitution’s Commerce Clause: “The Congress shall have the Power … To regulate Commerce … among the several States ...” Those few simple words have been the subject of thousands of pages of legal opinions over the many decades since 1787.
Early in the new nation’s history, the Supreme Court decided a series of cases that, notwithstanding the language of the Commerce Clause, the Constitution allowed states to also regulate interstate commerce, provided the regulations did not (1) discriminate against interstate commerce, and (2) did not unduly burden interstate commerce. In 1977, the Court introduced the idea of minimum “nexus” between the state and the taxed activity. Supreme Court decisions in 1967 and 1992 decided that a state’s power to tax an out-of-state seller turned on whether the seller had a “physical presence” in that state and that merely delivering goods into the state following an order was insufficient “presence” to justify the state’s sales tax on such a transaction.
South Dakota then adopted a sales tax structure that, among other things, applied only to sellers that annually send 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. Online retailers like Wayfair easily exceeded those thresholds and were thus expected to pay the South Dakota sales tax even though Wayfair had no offices, employees or other actual physical presence in the state. It’s “presence” in South Dakota was solely through its website and the delivery of purchased items from sources located outside South Dakota.
The opinion in Wayfair was 5 to 4 in favor of overruling the decisions that required a physical presence within the state. The Court still applied the “nexus” doctrine but found that, “Such a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Nexus, then, now exists for purely digital remote transactions. “Nexus” thus means “doing business.”
Reduced to its essence, the Court decided that the “physical presence” requirement as a condition of imposing state sales/use tax was inconsistent with the modern digital economy, creating a distorting set of preferences that favored remote sellers over local businesses. The Court was comfortable that the threshold provisions of the South Dakota tax law resolved any concerns about discrimination or undue burden on interstate commerce.
The only remaining concerns appeared to relate to the burden on small businesses, certainly a foremost consideration for travel agencies making sales in remote states with service-based sales tax regimes. It had this to say about the potential burdens on remote small businesses:
The Act ensures that no obligation to remit the 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. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.
The bottom line: states, and presumably localities, are now free to impose sales/use taxes on remote sellers of goods and services. This will require no new legislative action in many cases, but in others there will be a need for the state/locality to define what it is actually taxing. The Court’s decision may inspire states/localities to resume their efforts to add travel agent services because the new opinion takes away the “nexus” argument that has been a major element of the resistance to imposing the taxes on remote sellers. The Court downplayed the “small business burden” problem of, say, an agent in New York City being taxed in a couple of thousand jurisdictions with different rules, rates and rules.
I must wonder if it’s as simple as the Court imagines. The potential flood of state/local legislation can only be resisted effectively through collective action. Every agent who is concerned about the possibility of having to comply with dozens, or hundreds, of state/local sales tax laws, and that should be every agent with any interstate business, should join ASTA and support the coming battle.
End Note: If so inclined, you can read the 253-page Streamlined Sales and Use Tax Agreement at https://bit.ly/2tv1XKl.