Twitter is abuzz with the scheduled oral argument in Wayfair v. South Dakota on Tuesday, April 17, appropriately tax day across the country, and state tax professionals are descending upon the nations capital for what looks to turn into the state tax equivalent of a college football tailgate - sans the brats and beer (and insert cheese and wine ).
It's anyone's guess which Wayfair this will go, but there is a general sense that the Court will take this opportunity to overturn Quill and allow states to extend their taxing authority to economic presence. That said, I did here an interesting take from Jay Adams of Jones Walker recently. His "hot take" is that the Court could take this opportunity to stick the hot poker to Congress and highlight their inactivity on this issue. That would be an interesting development, so there remains a lot of intrigue.
This blog focuses on the Tennessee implications of the Wayfair decision, so there are a few things that Tennessee taxpayers should keep in mind as we wait for the Court to hear and then decide the case.
Fate of Tennessee Regulation?
Remember that Tennessee chose to avoid the political ramifications of enacting a statute imposing economic sales tax nexus, instead opting for the Department of Revenue to promulgate an unauthorized regulation. The consequence of that will be that a win for South Dakota will mean that Tennessee cannot just automatically turn on the sales tax for out-of-state companies. Instead, I anticipate that Tennessee would go back to the legislature (maybe a special session) to get a statute passed to avoid the risk of Tennessee acting without the requisite statutory authority (a secondary argument in the case pending in Tennessee - American Catalog Marketers Ass'n v. Gerregano). Without such action, out-of-state companies could just attack the regulation as unauthorized and delay the implications of economic nexus. It is an easy fix, and the legislature would just hide behind the Supreme Court decision to justify a vote to require the collection of sales tax on sales made by out-of-state companies.
Times Have Changed...
Another interesting implication of a ruling for South Dakota is that it would likely be an endorsement of the concept that times and technology have changed since the 1990's when Quill was decided. The States have been quick to jump on that narrative for the nexus argument, but what about all the outdated audit techniques used by Tennessee such as the gross-weighted markup audits of taxpayers? Relying on those antiquated audit techniques would be less defensible especially for restaurants and convenience stores with point-of-sale registers. Tennessee has been quick to attack these businesses for sales that don't match up with their weighted markup technique, but they may need to look in the mirror if the Supreme Court concludes that times are a'changin...
A Win for Wayfair?
If Wayfair is able to pull out the win, the statutes and regulations imposing economic nexus for sales tax would be unconstitutional, and it could raise the question of whether sales tax and income tax should be treated differently. Many companies have conceded economic nexus for corporate income tax cases based on the flood of state decisions that have followed Geoffrey and reached that conclusion, but my man Chris Doyle at Hodgson Russ gets fired up on this point. He continues to hold firm that physical presence is still the standard, even for income tax cases and that the only reason income tax nexus has taken a turn towards economic nexus is because all the cases are intangible holding company cases, which can be explained as affiliate nexus holdings. Sip on that for awhile.
So there you go! This will likely only be the beginning of the issues to consider whichever Wayfair the Supreme Court's ruling goes.