David Stewart 0:01

Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week, Wayfair, two years later. We're coming up on the second anniversary of the Supreme Court decision in South Dakota versus Wayfair, which allowed states to require remote sellers to collect and remit sales tax on online purchases. In the two years since this landmark decision, most states have adopted sales tax collection requirements, but the roll out of these new laws and regulations has created challenges for businesses of all sizes, and even for the states themselves. Joining me now by phone from her home in Virginia to talk more about this is Tax Notes legal reporter, Jennifer McLoughlin. Jennifer, welcome back to the podcast.

Jennifer McLoughlin 0:43

Thank you, Dave. It's nice to be back here.

David Stewart 0:45

Now, it's been two years since Wayfair. Can you quickly recap the Supreme Court decision and how it changed the sales tax landscape?

Jennifer McLoughlin 0:52

Of course. So the genesis of the Wayfair ruling was a South Dakota law that was basically designed to trigger a U.S. Supreme Court case. That law, which implemented an economic nexus standard for sales tax purposes, was swiftly challenged by several companies, including Wayfair. At the center of the dispute was the long-standing physical presence nexus standard for sales and use tax purposes. And under that standard, states were prohibited from requiring remote retailers to collect sales or use tax unless the retailer had an in-state physical footprint or in-state physical presence. Ultimately, as we all know, the Wayfair court overruled the physical presence standard. And now in the aftermath of the Wayfair ruling, retailers selling across state lines have faced a growing patchwork of laws and regulations imposing new tax collection obligation.

David Stewart 1:40

In honor of this being the second anniversary, we're splitting this episode into two parts. Later on, you'll hear a discussion between Scott Peterson, Avalara's vice president of U.S. tax policy and government relations, and Bradley Scott, the director of finance at Halstead Bead, a small business jewelry component wholesaler. But first, Jennifer chatted with Richard Cram, the director of the Multistate Tax Commission's national nexus program in Washington, D. C. Jennifer, can you tell us briefly about that interview?

Jennifer McLoughlin 2:06

Yes . So during that interview, Richard offered his insight on how states are continuing to respond to the Wayfair ruling. Including recent trends among states, as well as challenges that states are facing to increase compliance among sellers, and steps that they are taking to address such challenges. Richard also offered his thoughts on whether Congress could weigh into this issue, and he also touched on how the COVID-19 pandemic has affected the sales tax landscape.

David Stewart 2:32

All right , let's go to the interview, and we'll be back just before part two.

Jennifer McLoughlin 2:37

Richard, welcome to the podcast, and thank you so much for taking the time to be here today.

Richard Cram 2:42

My pleasure to be here, Jennifer.

Jennifer McLoughlin 2:43

So, it's been two years since the U.S. Supreme Court issued its ruling in Wayfair, and we've all watched as a patchwork of sales and use tax system has surfaced among the states. And as we all know, a lot happened in the first year following Wayfair. So real quick, I just want to look back briefly on the second year. I want to ask you Richard, what were the prevalent legislative or regulatory trends among states that were responding to Wayfair in the past year.

Richard Cram 3:09

Well, I think no surprise once the Wayfair decision came down, virtually almost every state that has imposed sales tax kind of jumped on the bandwagon immediately, and put in place economic nexus legislation. A lot of them modeled very closely to South Dakota, since South Dakota was successful in the Wayfair decision. At the same time, they also began enacting laws that would require marketplace facilitators to collect sales tax on the sales that they facilitated. It became pretty clear that if a state didn't do both of those things, they were going to miss out on a large chunk of the potential sales tax revenue attributable to internet sales transactions. So I'd say those have been predominant trends we've seen with states since the Wayfair decision came down.

Jennifer McLoughlin 3:54

So against the backdrop of those developments, we know that a n MTC work group produced a white paper that highlighted various issues a nd offered recommendations related to state r egimes that have implemented economic nexus and imposed those collection obligations on marketplace facilitators. And I know you were very involved in that white paper and the d iscussion surrounding it. I was curious, what feedback has the MTC received following the release of that white paper recently?

Richard Cram 4:21

I guess from my perspective, it's pretty much been positive. I think state legislatures, state tax agencies, business, community, were all happy to see something that kind of gathered together the information on all of the marketplace facilitator collection and economic nexus laws had been enacted to date by the states and attempted to kind of synthesize them, looking at the common issues that came up. One thing that probably I have heard from the business community is they wish the white paper would have gone farther in and said, "Here's our recommended way to impose economic nexus laws and marketplace facilitator collection requirements." They would like to have seen the states all take one approach that was uniform, and that would make it as easy as possible for internet sellers and marketplace facilitators to comply. That really hasn't been the case. Part of the reason for that is some states had already enacted laws even before our white paper effort got underway. So once you get a law on the books, the inertia against going back in and changing it is always there. So kind of the cat was already out of the bag at that point. And then in addition with our Federalist system, states are sovereign entities and they each have their own tax systems, and their state legislatures will define that in ways that are unique for their particular constituents. So, you're not going to find states all wanting to do things exactly the same way. So we do have some differences in a lot of these laws and I'm sure the business community, as I mentioned, they'd like to see everybody do it the same, but that's kind of the reality we have dealing with these differences, and then moving forward from there.

Jennifer McLoughlin 5:54

Looking at the paper and taking how you explained it, this seems like it was best practices for the state to kind of look at because they were not just developing, but in some cases maybe honing the laws and the regulations that were already on the books by the time the white paper was released.

Richard Cram 6:07

Yeah, you know , certainly the business community would like to have had the white paper say, "okay, here's the best practice for this particular issue." For example, there was two different directions in terms of defining what a marketplace facilitator is. One definition would be called a narrow definition, which would require the marketplace facilitator to take the order from the customer, take the customer's money, and then distribute the money where it needs to go, deducting its share, remitting the rest to the seller. The broad definition, you could be a platform, but even if you weren't necessarily handling the customer's money or didn't necessarily take the order, you could still fit within that broad definition of marketplace facilitator. And so the complaints came up that well, how's somebody that fits within that broad definition, how are they supposed to comply with the collection requirement if they're not handling the money or they don't have access to the transaction information? And the states fell roughly into half adopted the narrow, half adopted the broad . I think it's trending more toward the narrow definition now. But that's an example where the business community, they pretty much all preferred the narrow definition. But the reality we have is that we've got some states doing the narrow definition, some states the broad definition. And that's true with some other issues that come up in these economic nexus or marketplace facilitator laws.

Jennifer McLoughlin 7:20

So on the other side of the equation with regard to the state, based on what the MTC has heard , particularly during the development of the white paper, what have been the challenges states are facing to increase compliance among businesses?

Richard Cram 7:35

Oh, I think probably the biggest challenge is the culture among internet sellers prior to the Wayfair decision was "just so long as we collect in our home state, we don't have to worry about collecting for other states where we're shipping merchandise to our customers, as long as we don't have a physical presence in those states." And of course the Wayfair decision changed that all at once when the decision came down in June of 2018. So it's going to take a huge culture change to get the word out on that. I think certainly the larger multi-state sellers and many of them that already had physical presence in all the states, they're used to that. But your smaller internet sellers that had limited physical presence and maybe just a few locations, this was total new world to get used to. So that's one element. Another element is I think states are used to identifying businesses that open up on Main Street and haven't yet registered. Somebody sees them and checks them out, or it goes out, and asks them if they're registered. If they're not, then they'll tell them how to go ahead and get registered. Well, it's a different world now with the internet. You've got sellers all over the country, all over the world, in fact, selling merchandise to customers in your state. And there's no easy way to go out and identify those. And in particular, identify the ones that are selling at high enough volumes to exceed the state's economic nexus threshold. That's another challenge that the states have is changing the culture mindset of internet sellers, and also just coming up with developing the skill sets to be able to identify them and get the word out to them.

Jennifer McLoughlin 9:07

That sounds like a pretty steep challenge for states. So, based on what you've heard, how are states addressing those challenges in terms of increasing awareness among the business community, and also changing that culture?

Richard Cram 9:18

I think a lot of them have done a good job of posting information on their websites that are aimed specifically at remote sellers, internet sellers telling them, "OK, hey, we've passed this law. It went into effect on such and such a date. Here's what our economic nexus threshold is a hundred thousand dollars per year in sales or whatever it might be. Here's what our definition of a marketplace facilitator is." And they may have frequently asked questions that "once I exceed the threshold, how soon do I have to register and start filing returns?" Common questions that would come up. So they've tried to post information on their websites to inform internet sellers of what the new rules are. And I think explain how to get registered and just provide information on their websites, primarily. Initially I think states had been kind of hoping for a good voluntary response from internet sellers coming forward and registering. In addition, they had to kind of gear up their own systems for handling a large number of increased registrations from internet sellers, make sure they can handle those, get them officially registered and so on. Perhaps make their systems a little more user friendly for internet sellers. And then I think now since these laws have been in effect -- some of them approaching almost two years now -- I think states will probably turn more towards trying to identify those that haven't come forward yet and focusing more of their energy on getting them to come forward and register.

Jennifer McLoughlin 10:42

So say in a situation where it's a very small retailer, and perhaps they're not familiar with the Wayfair ruling itself, and maybe they haven't seen information on a revenue department's website, it's a little bit of a hypothetical question, but what happens in that kind of situation, where it's not through the intent of the seller to avoid the tax loss , it's just that they don't have that information? And I know that with some other sellers we've heard that issue of awareness. And so you know, you mentioned all of the different steps that states have taken, what happens if a smaller seller just doesn't have that information at their fingertips, even two years later?

Richard Cram 11:17

Well, I think states have to kind of treat everybody the same. Once they become aware of that business, then they'd obviously want to send them the information. Here's how you get registered. Here's how you get signed up. And digitally, they're forcing their economic nexus laws as of the date that their legislation was implemented, where the effective date might be October 2018, it might be January 2019, or January 2020 even. And they expect them to register in fall returns covering that time period. States also generally have voluntary disclosure programs. In fact, the MTC runs a multistate voluntary disclosure program, and a internet seller can apply for relief under voluntary disclosure. Although, that's going to still require them to go back and catch up on the sales tax, so as of the date that the state implemented their economic nexus provisions, assuming that seller has exceeded their economic nexus thresholds. But think they're still going to have to be required to comply once the state becomes aware of their existence.

Jennifer McLoughlin 12:17

So, as states and sellers are navigating this post-Wayfair landscape, of course, the question of Congress wading into the issue has come back. There was always a question of whether Congress would resolve the issue before the Wayfair decision. And of course, we know that different efforts never succeeded. Right now, what do you think are the chances that federal lawmakers will intervene in this issue? And do you think that they should?

Richard Cram 12:41

Well, I think from the states' perspective, we would oppose Congress getting involved. One thing is kind of the history behind this. After the Quill decision came down in 1992, the states and Main Street businesses began efforts to try to enlist Congress to give the states authority to collect from internet sellers, remote sellers , if they met certain simplification criteria that was suggested. One of the suggestions was if they've met the requirements to join the streamlined sales tax agreement. And then some of those requirements were loosened a little bit. And those efforts went on for about 20 years to no avail, until some point a couple of years before the Wayfair decision, I think states and the Main Street business community realized that it just wasn't going to happen. Congress, wasn't going to act. So ,the work began to lay the ground work to overturn that Quill decision, which they were successful at. So, now I think the states kind of view this as a little bit ironic that there are folks who want Congress to now get involved and, say, dictate how states can tax internet sales, when prior to Wayfair, and during the time when there were efforts to get Congress to give states that authority, those same parties were opposing efforts to get legislation. So, I think from the states' perspective, they realized that they need to do what they can to make compliance easier for internet sellers, remote sellers. But the last thing they want to see is for Congress to try to jump in there and dictate some solution to them. So I'd think there'd be opposition, and the hope is that Congress has enough other things on their plate that they're not going to get concerned about this.

Jennifer McLoughlin 14:16

Actually, that's a good segue to my next question. I want to briefly bring up something that is on Congress's mind every day these days, the COVID-19 pandemic. There's no shortage of anecdotes regarding the devastating impact on businesses. I was curious what you have seen or what you have heard regarding how this has impacted states with regard to the sales tax landscape, including the remote sales.

Richard Cram 14:37

Well, there's kind of two impacts. And the one impact of course is everybody else in the economy has gone down. That's a huge decline of revenues for the states, and that of course has immediate impact on their resources. A lot them are holding off on doing audits, for one, health reasons, and two, it's the lack of resources to go out and do a lot of auditing. At the same time, the COVID-19 has kind of accelerated the trend toward the internet marketplace. People are buying things on the internet that they wouldn't have hesitated to get in the car and go pick up at the store. So revenues from internet sales have become even increasingly important. So, I think states again want to make sure they make it easy for internet sellers to comply with their sales tax laws, and that will also enhance their own revenue outlook. And as I mentioned, think states are going to eventually focus more resources on identifying non-filing internet sellers and getting them into compliance. But in the short term, you're probably not going to see a lot of that just because of lack of resources to go out and do that at this point. But eventually it's going to be a big need.

Jennifer McLoughlin 15:42

You mentioned identification. I want to go back to that issue that we discussed earlier. How do states go about identifying sellers out there that need to comply? I'm sure there are different ways to do it, but I'm just curious how. What manpower do they need? What resources do they need, and how do they actually operate to do that?

Richard Cram 15:59

I don't have a lot of expertise on that. I know there are companies out there that will sell lists, that these are like the top thousand internet sellers. That's probably something that states would be interested in. My guess is there'll probably be businesses that will market themselves to state tax departments as , "Hey, we can help you identify non- filing internet sellers because it is difficult for state tax departments to do that thing independently." Again, because it's something totally new to them. It's a different than like I said, spotting a new business that opens up on Main Street that hasn't registered yet.

Jennifer McLoughlin 16:32

So, final question is regarding what can we look for or expect in the future. As we look towards the third year, what do you think might be new trends amongst states? Whether it's in regard to legislative or regulatory efforts or perhaps even the issues you discussed in terms of raising awareness, helping improve compliance, and identifying sellers. What do you think we might see from states in the next year?

Richard Cram 16:56

Well, I think there's a few states out there that haven't yet put economic nexus or marketplace facilitator laws on their books yet. You may see those get laws enacted, particularly with increased revenue pressures on them as a result of COVID-19. We're going to have to wait and see on that. And then also I believe that states are going to take a look at how are the laws that we've put in place so far-- economic nexus and marketplace facilitator collection laws. How are those working? Are there some administrative issues that we need to iron out? I mentioned there was a definition issue for marketplace facilitators. Are states having difficulty applying those definitions? Is that creating issue? I think states are going to continue to move toward trying to get their tax basis up to date, to include more services, particularly digital products or electronic services, in order to keep their tax bases from otherwise shrinking as the economy moves toward a more service based economy. And those service transactions are more complicated to try to source than sales of tangible, personal property. Tangible personal property generally want to source that to the location where the customer receives the merchandise. It's a little bit harder to do when you're talking about perhaps electronic services, where it may be sold to customer that's mobile or accessible by several employees of the customer idea sources, transactions . So I think sourcing will be a more complicated issue going forward. I think states are going to see if they can simplify their registration systems , simplify the returns. I know that's one issue with marketplace facilitators and you've got marketplace sellers. And so the question is, well, what if the marketplace facilitator's collecting on all of the sales that are facilitated for a marketplace seller, does a marketplace seller have to file a return at all, or report any information? Is it all going to go on the marketplace facilitator's return as the marketplace facilitator? How are they going to be required to report that information on their returns? And I think states are also going to be interested in eliminating the zero return situation where you've got a seller who technically falls within that requirement to register, but they're making just wholesale sales or their sales are such small dollar, but high volume so that maybe they exceed the transaction threshold, but that results in just minimal tax remittance. Can some of those situations be eliminated to kind of decrease the administrative burden on both sellers and the tax departments? So I think the jury's kind of still out on the laws have been put on the books. Are there some issues there that need to be ironed out to make them work smoother for both tax agencies and businesses?

Jennifer McLoughlin 19:27

Real quick, this might be a premature question, but do you think the MTC might form another work group to address some of these particular issues? So for example, you mentioned the zero return issue. I know that was touched upon in the white paper. Does MTC have any plans of just continuing that work and the group as it's already formed? Or might there be individual projects focusing on particular issues that might be really problematic for states?

Richard Cram 19:53

Uh , yes. We definitely want to keep that work group going. Just a little background, that work group was formed to help develop the white paper. We published our white paper at the end of 2019 and have tried to keep it up to date to include any additional marketplace facilitator, economic nexus laws have been enacted by states. And really the idea of that work group was to remain open, to deal with any issues that come up. Now, since the COVID-19 pandemic, the work group has been kind of taken a hiatus. At some point, we're going to crank up again. I think also the state tax agency folks, as I mentioned, wanted to have some time to see how their currently enacted laws are working. So, my guess would be later this summer or fall, that work group may pick up again and try to address any issues that come to their attention that need to be ironed out.

Jennifer McLoughlin 20:41

Well Richard, thank you so much for taking the time today to join us and to discuss the post-Wayfair landscape. We really appreciate your thoughts today.

Richard Cram 20:50

Well, you're certainly welcome, Jennifer. Glad to talk to you .

David Stewart 20:53

Now we'll hear from a conversation Jennifer hosted between Scott Peterson, Avalara's vice president of U.S. Tax policy and government relations, and Bradley Scott, the director of finance at Halstead Bead, a small business jewelry component wholesaler. Jennifer, can you tell us a bit about what Scott and Brad discussed?

Jennifer McLoughlin 21:40

That conversation delved more into how retailers are navigating the post-Wayfair world. Scott and Brad touched on several topics, including retailers' awareness of changes among states sales and use tax system, and retailer's challenges in complying with those various regimes. Both Scott and Brad also discussed the impact on retailers from the coronavirus crisis, as well as the notion of congressional intervention in this issue.

David Stewart 22:05

Let's go to that conversation.

Jennifer McLoughlin 22:08

Scott and Brad, welcome to the podcast, and thank you so much for being here.

Bradley Scott 22:11

Thank you. I appreciate the opportunity.

Scott Peterson 22:13

Thank you very much. I appreciate it as well.

Jennifer McLoughlin 22:15

Of course. So let's just jump right into it. Here we are about two years later after the U.S. Supreme Court's landmark Wayfair ruling. But following that decision, states have swept in with varying legislative and regulatory responses over the last two years. So, the first question I'd like to ask relates to sellers' awareness, specifically, what is the level of awareness among sellers regarding both the Wayfair ruling and the state's various laws and regulations requiring sales and use tax collection from remote retailers? So Brad, let's start with your thoughts on this issue.

Bradley Scott 22:48

Well, mine is anecdotal. I know that Scott's business has done a recent survey on the issue. But from our own experience thus far, we've only received a single notification from one state that we may or may not have a sales tax collection obligation. In speaking with other companies around the country, few are really aware that it applies to them, primarily because in the media it's been discussed historically as an online sales tax issue. And a lot of businesses that are not involved online are just now waking up to the reality that if they're selling across state lines, it applies to them as well. And then it's the retail issue as well. Our business is primarily wholesale. We have been in compliance since the very beginning, but that's because we weren't paying attention to the headlines, we were actually reading the articles and what was coming out of the Supreme Court, as well as the Amicus briefs. And if you are not engaged in retail or online transactions, then the headlines thus far don't make it look like a decision applies to you.

Jennifer McLoughlin 23:41

You mentioned the survey that Avalara has put on this issue. So Scott , I want to move to you regarding that survey and what you, what Avalara found regarding sellers' awareness on this issue.

Scott Peterson 23:52

Thank you. We found frankly much of what Brad just described. We surveyed large businesses, medium businesses, and small businesses and found that on the large business side, they're much more aware of Wayfair and its impact on their business, much more so than those in small businesses. But even in the large businesses, even though they're aware, they weren't all comfortable that they were in compliance. And the further down the scale you went in the size of the business, the less comfort there was in whether or not they are compliant. Brad's description of his own experiences are exactly what we see and what we hear. We don't get a lot of folks who call us up and say, "South Dakota just called us and says, time to start collecting their sales tax." What we hear is "my accountant just called me and said, you know, I think you have an issue. We should talk about you doing some more sales tax compliance."

Jennifer McLoughlin 24:43

So in terms of increasing sellers' awareness, Scott, start with you first, what steps do you think can be taken either by states or sellers themselves, to help increase awareness? And this might be more of a state's burden to get that information out there, but I want to get your sense on what can be done to help improve sellers' awareness of this issue.

Scott Peterson 25:02

A reasonable person would argue that this is truly the state's responsibility and it's the state's fault if it doesn't work. The problem with that is that eventually some state is actually going to do something. And the fact that they've told no one isn't going to excuse anyone from having an obligation. And two years past the Supreme Court decision means that everybody's exposed to two years worth of liability in certain states. Honestly, the states struggled in the beginning. They were surprised by the Supreme Court decision as much as anybody was, and a lot of them didn't have legislation. So they didn't know what to do. They didn't know what the legislature was going to do. And we still have states that don't have legislation. And they don't really have a method to talk to people outside their system. They're all very good at providing information to the sellers that are inside their Department of Revenue's tax system. They don't know who's not in it. And so they don't have them. The best that they can do, work together for common messaging and then-- but send that common message to their own people. And I know I've seen examples of things on state websites and emails and newsletters that have gone out to licensed taxpayers in the state saying, "Hey, if you do this, you may have an obligation of sales tax somewhere else." But I don't think that's been done uniformly . And I don't think it's been done universally.

Jennifer McLoughlin 26:17

Brad, from your perspective, what do you think? What would you hope that states would do to help improve sellers' awareness of the issue?

Bradley Scott 26:24

Well, I believe there's a mechanism that already exists for this. The streamlined sales tax governing board has 24 member states, and I think there could be some tweaks to the systems that they use that would allow for a more easily disseminated information. If the state of Arizona's Department of Revenue was to reach out to every business inside the state of Arizona and say, "There may be an obligation for you to be collecting sales tax with all of these other states," then every business in Arizona would be made aware right away. The unfortunate issue is that since the Supreme Court made their decision two years ago, there's not been a single state that's joined the SST. I think legislatively, if states aren't willing to make that outreach, then the affected parties or the businesses involved should probably not have any compliance obligation until they are notified by the jurisdiction that wants their compliance.

Jennifer McLoughlin 27:08

You mentioned, Brad, the Streamlined Sales and Use Tax Agreement, and you noted that no state has joined that agreement since the U.S. Supreme Court's decision. I was curious what your thoughts are, and Scott, I'll also ask what your thoughts are on this, but why do you gentlemen believe that no state has joined the agreement since that decision? Specifically since Justice Kennedy's opinion highlights that agreement as one of the factors that suggested South Dakota's regime was probably permissible. Brad I'll start with you.

Bradley Scott 27:37

Well, I think you just hit the nail on the head. The Supreme Court issues opinions. They cannot issue laws. So if the states are not willing to jump on board independently, then there has to be some legislative initiative at the federal level to force them into it. And if that's not going to be the case, and again, that goes back to the notification and the affected parties, the Supreme Court said, these are good ideas, but did they say that the states have to do it? No. And there are a lot of states where the cities and the municipalities don't agree with the state agenda, and Arizona is a prime example of that. And there's a lot of infighting. I've dealt with our legislators within the state for the last year. And every time I have gotten into the conversation about why doesn't Arizona join the SST, they cannot get the cities on board. Until there is some, I hate to use the term, but some stick to go along with the carrot, then I don't think you're going to get mass adoption.

Jennifer McLoughlin 28:28

Scott, moving on to you with your background on streamline, what are your thoughts about the situation where we haven't seen states jump on board the agreement since the Wayfair decision?

Scott Peterson 28:37

Some of that is a function of how SST started and evolved. You know, SST started as an initiative to eliminate the complexity. And all the effort done by all those people for all those years was around just dealing with complexity, and with the hope perhaps that it would all be universally adopted. And there wasn't enough buy-in from the very beginning, universal buy-in. There was a lot of buy-in, but not universal buy-in. Many of the things that were addressed in SST were historical complaints from the business community about how multiple sales tax impacted them. And with time, some of those things have eased because there's technology author today that makes it easier to operate a business than you did 45 years ago. And a lot of the businesses that were involved in the early days of SST had been in business for 45 years. They were all legitimate businesses that had a lots of complexity, lots of lack of technology. And they were trying to deal with things that made their business complicated that they couldn't automate. Well, in the last 20 years, a lot of that's been automated. Some of the reasons gone away. And that's kind of worked against SST is now there is automation. There are maps that show you what the tax rate is everywhere. There's a dozen different services out there that tells you what's taxable. There's any different number of ways to file a return today. And I talk to state legislators all the time who say, SST legislators, who say, "well, if the software out there can do all this stuff, there's technology to do this. Why do I have to change anything?" And so you have this perhaps overreach in the very beginning, because we were dealing with, in that time, 70 years of lack of technology and 70 years of absolutely no effort whatsoever by anybody to make the system better, to a point now, 20 years later, where the private sector said , "okay, you got a problem? It's a simple yes or no. We can figure out a way of turning that simple yes or no into a software program that does this for you." So some of it is just because we were dealing with historical issues, some of it's because the recent history has changed how the whole world retails . And there's a bunch of people out there that look at that Supreme Court decision and say, "they didn't tell us we had to be part of SST, they just said that it's nice that South Dakota was." So lots of reasons. None of them are relatively simple to overcome.

Jennifer McLoughlin 30:51

You mentioned automation and software and that's kind of triggers my next question. Moving on from the issue of just sellers' awareness of the issue, let's move on to something more specific in terms of just compliance challenges, and what tools can be used to help sellers with compliance such as software. So, Brad , I want to start with you first. From your perspective, what are some of the general compliance challenges and related costs that sellers are facing? And what is being done to address that or help them improve compliance?

Bradley Scott 31:23

There are a couple of issues. And you know, if you're talking about a retail- only business, I would imagine that the sales tax software that's out there operates pretty cleanly. I know with our retail transactions, we don't really have any problems with the software that we're using, but we run into a lot of issues when it comes to the exempt transactions-- the exemption certificates that we have to collect. And then you start getting into the nitty gritty. And when you're looking at threshold amounts for whether or not your business has met threshold in the various states, there are dollar thresholds. There are transaction thresholds. The threshold measurement periods, they vary between locality . So you've got $100,000, $200,000. In Arizona's case, it's a $150,000 threshold. You've got different thresholds all across the country. Some of the states have a transaction threshold, some don't, those transactional thresholds can vary. And then when you start talking about the measurement period for whether or not you reach that threshold, you've got yourself, basically a reporting nightmare that every single month you have to go through state by state and determine if you have to look at the sales for that state each month. If not, then you have to look at it for the prior quarter. You've got to look at all these different variables. And so when you start talking about the automation factors of it, for a small business like ours, we don't have a SALT team, we have a SALT person and that's me. I have an assistant that helps me with some of the technical paperwork, but really I am the entire SALT team at our company. And so, when you're discussing the tools that are available to me, yes, the tools are available to me, but I am also the accounting department. I am the benefits administrator. I am the payroll department. I wear a lot of hats. And so the idea that I am capable of helping our company stay completely compliant with SALT all by myself. It shows a lack of understanding of what small businesses face. Just to give you a point of reference, Wayfair, the company that was on the other end of this court case, they're 1,500 times larger than us. In 2018, they were 1,100 times larger than us. So they were a fairly non-sympathetic plaintiff. And they were an easy target to go after for South Dakota. But I think South Dakota, had they come after a company of our size, might've found a different reception from the Supreme Court. So is there software available? Yes. Does it handle every part of sales tax? No. And that's where the real problems creep up, is that there are a lot more details that have to be addressed than just the sales tax itself.

Jennifer McLoughlin 33:34

Scott, going back to you, what are your thoughts about what Brad just said in terms of just the compliance challenges and automation and software tools available for sellers?

Scott Peterson 33:41

I agree with everything Brad said, other than the fact that I disagree with him that there isn't a tool available. I think there is a tool available for all the issues that say retailers and wholesalers encounter, but there's still work involved in operating those tools. There's someone who's responsible for making sure the tool gets turned on in the morning and gets turned off at night. And so the right data goes in and the right data can come out. In our experience, it is easier for retailers than it is for wholesalers, but some of that is simply a function of just how complicated it is for wholesalers. I've told people for years, and it just annoyed the heck out of my friends in state government, and I tell them , "y'all, don't give enough thought to how expensive you make, not collecting sales tax." It's really expensive to not collect sales tax in this country. And if somebody had a great idea on how to eliminate that, an awful lot of the expenses and sales system would go away just by that. But I haven't heard that idea, and I've been doing this for a long time. I can't think of a good idea. You know , the big challenge for everybody is that none of these things work independent from each other. Everything has to work together. And if you're going to collect sales tax, if you're going to be a retailer, you're going to sell to people who are exempt, or you're going to sell something that's exempt somewhere. And so your sales system has to account for your exemptions . Most of ours and our competitors all have that process built in, but it's a function then of how does California's requirements to prove you've made an exempt sale differ from Wisconsin's, because they're not the same. And that all has to be built in the system. And that person who's going to be audited, Brad, in this case. Brad needs to know where those two states differ from each other so that he can provide some degree of comfort that when he does get audited by California and then by Wisconsin, that process you use for one works for both, or what does he have to have two processes in place. It's legitimately not simple, which is why there's frankly a market out there for folks that can help businesses, whether it's a Big Four accounting firm or a little tiny company like Avalara.

Jennifer McLoughlin 35:41

Real quickly, before I move on to the impact of the COVID pandemic with regards to this issue, I want to quickly ask you both . Are there any specific things, a few targeted things that states could do to help sellers with compliance? Scott, let's start with you first. And I know it's not simple, like you said, so this might be asking for a lot to narrow it down to just a few examples, but what are some general thoughts you might have on that?

Scott Peterson 36:03

There is no question that governments, I don't think anywhere in the world, actually care what it costs for the taxes to be administered. I mean, you can look at the range of taxes imposed by governments in the United States. Almost 100% of the burden, whether it's the administrative burden and the financial burden, falls on business. Almost all the property taxes paid in the United States are paid by a bank, through a mortgage. All the sales tax reflected by a business. All the withholding taxes are by definition of withholding taxes is withheld by business or admitted by the business. At every level of those taxes, there's a business system, is responsible and is liable . And there's almost no real concerted effort by any level of government to solve the finances. I don't know how you ease the burden of some of the technical issues, but you can certainly use the financial burden. SST is the only example of a coordinated consolidated look at what it costs business to collect sales tax, and then to provide some sort of financial relief from that cost.

Jennifer McLoughlin 37:04

Brad, turn to you. What are your brief thoughts on that issue in terms of what states can do to help improve compliance or help relieve some of the compliance challenges for sellers?

Bradley Scott 37:12

Well, I think that there are a couple of things that they could do right off the bat. First of all, the threshold should be set at some sort of uniform rate, whether it's a $100,000 a year or some other arbitrary number is really not something that I'm too concerned with. But if they were all the same, then at least at that point, you would recognize, yes, I meet it in this state. I meet it in this state. Maybe I don't meet it in this state. If they did away with the transactional thresholds, that would simplify things enormously. And if you start thinking about smaller dollar transactions, it's very easy for a small parts manufacturer to get into transactional trouble for selling $2 pieces across the country. And then if they made the measurement cycles, the threshold measurement cycles, uniform. So by that, I mean the calendar year, every December 30th, you need to look through your books. You need to see where you've met threshold for that year. And then if you did, you collect sales tax for that state the following year, and it's an easy yes or no decision. There, isn't a monthly audit that you've got to do just to make sure that you're complying. So those are a couple of things. Moving over to what Scott said about the SST. I think SST membership has significantly improved some of the challenges that we have with the SST member states. So much so that there are times when I consider deregistering from all 24. And then there are other times when I realize it's not worth the trouble as to do so. And one of the benefits that the SST states themselves receive just because they are members, is that a company like ours, which probably doesn't meet threshold in them. Um, and to be, let's be specific. There are 16 SST states where we do not meet threshold that we are remitting sales tax to on an ongoing basis. And thus far we send about $1,200 a month to those 16 states. Now, no, that's not a lot of money, but we don't meet threshold. So we're kind of a voluntary compliance, and they're benefiting just because they are SST member states. If the other 21 states and the District of Columbia would join, then I know that our monthly remittances to, for states or localities where we do not meet thresholds, would go up, it would benefit them. And if they were to make this simple again, by going through our state's Department of Revenue, as opposed to having businesses actually have to reach out themselves, then they would probably find that their compliance rates surged. When you look at the number of businesses that are filing in Arizona that are not physically present in Arizona, it is a much smaller number than I would expect. And I think that most states would probably say the same. And I think Scott probably has a better figure on that.

Jennifer McLoughlin 39:32

Well, I'd like to shift to what we're seeing nowadays with the COVID-19 pandemic. The tax industry has certainly not escaped the grip of this global health scare. I was curious what you both thought in terms of how this pandemic has affected the remote sales tax landscape. And Scott, let's start with you on your thoughts.

Scott Peterson 39:51

You know , we've done some analysis of our customers to see the transactions that run through AvaTax and look to see whether or not there's a change. And there's been a significant change in how some of our customers have been impacted by COVID. I've told these stores , their sales just dropped through the floor. Grocery stores went through the roof , home fitness stuff went through the roof, whereas gym memberships dropped to nothing. So what we're seeing from COVID is what I think we all expected to see, is if you can't go into a store, then that store's sales are going to suffer. If my only choice to shop is to shop online, then that's going to go up, but there's things that I don't need at home that I would have gone out for, and gym membership and clothing, dry cleaners. It's just amazing, the effect that this has had on dry cleaners. In normal times, I'm wearing dry clean only clothes almost every day. In these times I'm never wearing dry clean only clothes. And so the dry cleaning business is just dying. Not because they aren't open, cause they're all open, it's that no one's wearing clothes that need to be dry cleaned. I mean, we've got good friends who they took this quarantine extremely seriously. They never went outside for three months other than to walk their dog in the neighborhood. They didn't stop shopping . Everything came to their house, clothes, groceries, everything was delivered to their house. And so this is just normal. I mean, you can't go out shop, but you still shop. So there's a number of our customers that were traditional stores and now a web presence. And it's just what we should expect.

Jennifer McLoughlin 41:17

Brad , how has the pandemic affected your business?

Bradley Scott 41:19

Well, if I looked back at March 1st through May 31st of this year and compared it to last year, our sales are down by almost 19 percent By the same token, our volume is down by 26 and a half percent. And you may wonder why that difference is there. Last year to compensate, or to make up for the cost of compliance, we had increased prices. So there has been some inflationary effect here because of sales tax. But I can tell you right now, a sales tax collection over that period, March 1st to May 31st, from us, has dropped by 57 and a half percent year on year. Now, going to what Scott was talking about earlier, we are a fashion industry and people aren't buying jewelry, people aren't buying clothing. People are, they're focusing on groceries. They're focusing on the necessities. Now going into one of your questions earlier about how this is going to affect tax overall, much of last year, I heard that the states were giving us a grace period to come into compliance. And I heard rumors throughout the year that they were going to begin enforcing sales tax collection for remote sellers, more forcefully in January or sometime early in this year. And while those rumors still have not come to pass, I do wonder if the desperation that the departments of revenue are now facing because the brick and mortar remittances have declined so much, if those enforcement periods aren't going to start proliferating.

Jennifer McLoughlin 42:36

So I want to get your thoughts on one final question regarding Congress, and specifically the idea of Congress wading into this issue now. There was a House subcommittee hearing back in March, during which retailers press lawmakers for federal legislation to standardize states regimes. I want to ask should federal lawmakers intervene on the issue at this point? And what's the likelihood that Congress will intervene? So Brad let's start with you, as I know that you testified during that subcommittee hearing.

Bradley Scott 43:06

I am not sure that they really want to get involved primarily because it's a states' rights issue. However, I think based on the conversations I've had with small businesses across the country, that unless the states actually start to operate with the understanding that they are not a standalone tax regime, but they're part of a greater tapestry. If the states aren't willing to do that on their own, I don't know how the federal government is not going to be forced to act. I spoke with a company last week that just found out within the last two weeks that they have sales tax compliance obligations. They did an internal audit and realized that they've got 28 states that they need to collect in and remit to . And they're almost two years behind the eight ball. So what happens to their business? I don't know, but I do know that there are going to be a lot more businesses like theirs that pop up. So I think that the federal government has going to have to do something, but I do think that their hand is going to get forced as opposed to them paying voluntarily. I know from the standpoint of a small businesses operating remotely, one of the things that they could do, which would very quickly alleviate a lot of challenges that small businesses are facing, is allow for remote sellers to have a single rate within a state, rather than forcing remote sellers to have to collect at the municipal level. And I know Scott will have a better understanding of the history behind that, but from a layman's perspective, I think that would simplify things dramatically. And I don't see how they can't act. I just don't think that they're going to do it willfully.

Jennifer McLoughlin 44:24

So, Scott, final thoughts from you on whether Congress should and will intervene on this issue?

Scott Peterson 44:31

Honestly, I don't think they're going to, they lack an incentive. You know, for the 10 years that I lobbied Congress trying to get them to regulate state taxes. I was told no by Democrats, told no by Republicans, just about everybody told me, no, they didn't want to get blamed . That's a reasonable position for them to take, but they also didn't know where to start to draw the line. All those 10 years, I had a piece of legislation. I said, this is where you draw the line. These are the things that the business community and this group of states think are what makes a sales tax viable in the 21st century. And so they had an option. They didn't like it. Some of them didn't want to impose on states. Some of didn't pick up far enough. Some of them came from states that said I don't want to do anything. So I'd rather not collect the tax at all I it means I have to do these things. To get to Brad's comments, I think that's where we would find ourselves today is the members of Congress from Texas are going to just hear thousands of complaints from local governments in Texas if it's one rate. And they have one rate in Texas. Even if Congress said you have to do one rate, you'd still get complaints from elected officials in Texas, where there is one rate if you're a remote sellers. But I mean, there's truly 12,000 jurisdictions in this country that have sales tax. And there isn't one rate in a lot of them. Some places it is one rate. Mississippi, it's all one rate, Virginia, it's all one rate, even though they're all individually imposed taxes. But even there, it's still not simple. I don't believe Congress is going to do it. If Congress was going to do something, they had a tool, they had them , you know, the Main Street Fairness Act. So they had a mechanism they could've used to impose that kind of simplicity and requirements on states, and they didn't jump right on it. So two years later, they're I think less likely to jump on anything, given their pressure that they hear is from small businesses, and big businesses are giving them the exact opposite story. And so, you know, the legislation that I see Congress trying to adopt, it's all being supported by big businesses, not little businesses.

Jennifer McLoughlin 46:18

Well, I hate to end this conversation. Thank you both for joining us today and weighing in on this post-Wayfair landscape. I really appreciate your taking the time to give us your thoughts.

Scott Peterson 46:27

You're very welcome.

Bradley Scott 46:27

Yeah. Thank you very much. It's not going away, but I hope that we can work towards an easier solution for everybody.

David Stewart 46:35

And now coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from her home is Content and Acquisitions Manager, Faye McCray. Faye, what will you have for us?

Faye McCray 46:45

Thank you, Dave. In Tax Notes Federal, Lori Hellkamp and Alden Dilani-Morton explain why new anti-hybrid regulations may make investing in U.S. companies more complicated. Naya Pearlman and Natassia Koyfman provide a decision tree that will help partnerships determine whether to amend their 2018 and 2019 tax returns in light of new QIP rules. In Tax Notes State, its advisory board members discuss how to successfully navigate State Tax measures during COVID-19. Robert Plattner proposes a commerce clause challenge to an investment tax credit statute. In Tax Notes International, Patrick Martin explains how a “loophole” in the Foreign Account Tax Compliance Act enables unscrupulous tax and financial advisers to help their nonresident alien clients hide income earned in U.S. financial institutions. Michael Kandev and Jesse Boretsky discuss the Canadian Federal Court of Appeal’s judgment in Alta Energy. On the Opinions page, Roxanne Bland interviews Nicki Howard, senior tax counsel for CSX Transportation Inc. Benjamin Willis and Joseph Thorndike discuss the Whiskey Rebellion, the first time the federal government used military force to quell a domestic uprising.

David Stewart 47:57

You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, and be sure to follow @taxnotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts . org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast, we'll be back next week with another episode of Tax Notes Talk.