The internet sales tax Supreme Court case is huge, but won’t impact wineries much
April 16, 2018
By Jeff Carroll, Chief Product Officer
The US Supreme Court (SCOTUS) will begin hearing arguments this week in the case of South Dakota v. Wayfair, Inc., and a likely outcome is that states like South Dakota will gain the authority to compel sellers like Wayfair to remit sales tax, even if they do not have a physical presence in the state. If the Justices agree that South Dakota has the right to tax these out-of-state (“remote”) sellers, wineries will probably not see a tremendous amount of change as a result though.
At issue in Wayfair is whether SCOTUS should overturn a 1992 decision called Quill Corp. v. North Dakota that created the current standard where a state can only go after out-of-state sellers (including eCommerce businesses) for sales tax remittance if they have “substantial nexus” in that state. A simple scenario for thinking about what nexus means is one where the seller has a physical presence because of an office, a distribution warehouse, or an employee in the state. However, nexus definitions can be tricky, and states tend to define and enforce nexus differently.
Wineries already pay sales tax in most states
US wineries are already used to dealing with complicated sales tax requirements from state to state. The 1997 Model Direct Shipping Bill that has been used as a guide in state legislatures across the country since then includes the requirement that wineries remit sales taxes to the destination state.
If located outside of this state, annually pay to the [State Revenue Agency] all sales taxes and excise taxes due on sales to residents of [State] in the preceding calendar year, the amount of such taxes to be calculated as if the sale were in [State] at the location where delivery is made.
The requirement to remit sales tax typically comes as a prerequisite to obtaining a license from the state Alcoholic Beverage Control (ABC) agency for the purpose of shipping wine directly to consumers. As a result, unlike most small- to medium-sized businesses (SMBs) that are operating under the Quill guidance, wineries that are licensed to ship to consumers are already remitting sales tax to the destination state in the majority of states that allow direct shipping. Therefore, if SCOTUS overturns Quill, it will have enormous implications for most SMBs in the United States, but US wineries will likely see minimal change to the status quo.
South Dakota’s new law that is being challenged by Wayfair says that businesses that sell more than $100,000 per year or make more than 200 transactions (sales) per year must register to pay sales tax. If you assume that the average order size for wine shipments is roughly $200 though, 200 transactions for wineries means about $40,000 in annual sales. Since the majority of wine shipments come from small wineries, most wineries will also generally fall under this $100,000 / 200 transaction test if it becomes the new standard for sales tax registration.
As can be seen in the map, there are effectively five different types of states from the perspective of a winery (Prohibited, NOMAD, Required, Not Required, and Unique Rules). I’ll break down each of the groups below.
Prohibited: The set of states that still do not allow wineries to ship to consumers for off-site sales includes Utah, Oklahoma (coming October 1st), Arkansas, Mississippi, Alabama, Kentucky, Delaware, and Rhode Island. Since shipping is prohibited in these states, the question of sales tax registration is moot unless wineries decide to ship non-alcoholic items like winery merchandise or clothing.
No Sales Tax: There are five states that do not require sales tax, and those states are commonly referred to as the NOMAD states. New Hampshire, Oregon, Montana, Alaska, and Delaware all fall into this category. New Hampshire presents a special case that I’ll talk about below.
Unique Rules: Wyoming, Kansas and New Hampshire each have special taxes on wine products that are sometimes referred to as “markup taxes”. These are a hybrid between an excise tax and a sales tax where a percentage is applied to the retail value of wine sold to consumers in the state. In New Hampshire, for example, even though it is a NOMAD state that doesn’t require any sales tax, wineries must pay an 8% markup “fee” (they despise the word “tax”) on the retail value of wine shipped to the Live Free or Die state.
Sales Tax Not Required: Wineries with no nexus are not currently required to register for sales tax in Colorado, Minnesota, Iowa, Missouri, Florida, Washington D.C., and Massachusetts. Minnesota is considering a bill this year that would create a permit and the requirement to register for sales tax. Massachusetts is a special case where sales tax is required for businesses that sell non-alcoholic products, but wineries are exempted because of a ballot initiative that repealed sales tax on alcohol. Also, Wine Institute recommends that all wineries voluntarily register to collect and remit sales tax in Colorado because of a unique reporting requirement. That leaves Minnesota, Iowa, Missouri, Florida, and Washington D.C. as states that could potentially revisit their sales tax requirements for wineries, depending on how SCOTUS rules in Wayfair.
Sales Tax Required: In all of the other states not listed above, wineries are required to register for and remit sales tax. Sometimes states requires a flat rate for the entire state, and sometimes states require sales tax at the local jurisdiction (city and county) level as well. In Texas, wineries that do not have nexus are required to pay the base state rate of 6.25% only, but wineries with nexus are required to pay local taxes in the specific jurisdiction(s) where nexus occurs.
Will Congress act?
SCOTUS experts are predicting the “Kill Quill” movement to prevail, meaning that South Dakota will see its law upheld, and the 1992 Quill decision will be effectively overturned. However, much will hinge on the scope of the ruling and therefore how states can craft future laws to take advantage of the new precedent. Assuming Quill is overturned, states will surely rush to their legislatures to take advantage of their new-found ability to close the tax gap between their in-state businesses and out-of-state businesses that are not collecting sales tax. Given that state and local governments lose out on at least $26 billion of uncollected sales tax annually according to a 2015 estimate, the incentive for states to act quickly is very high. Similar to the flurry of state legislation following the 2005 Granholm v. Heald SCOTUS decision, we’ll see a new type of rush as states will likely read Wayfair closely to improve their budget gaps by finding a constitutional way of collecting tax from remote sellers.
The wildcard in this sales tax battle is Congress, where interstate sales tax requirements could be clarified. The SCOTUS decision in Wayfair could prompt Congress to finally settle the score on sales tax law instead of relying on court decisions. Congress has made multiple attempts to create new laws around internet sales tax over recent years, but to no avail. If Congress does act though, it would be possible if not likely that the outcome would be a comprehensive simplification of sales tax rules. One of the central claims from the Kill Quill contingent is that the world has changed significantly since 1992 and sales tax software has made it much easier to comply with state and local laws. However, complying with 50 sets of state and local jurisdictional rules is unbelievably difficult for SMBs. Sales tax software, which can be expensive and cumbersome, is certainly not a panacea. Following this SCOTUS decision, regardless of the outcome, Congress should act to provide clear guidance and to simplify the process for SMBs.
As always, contact us if you need help getting registered, calculating sales tax, or remitting sales tax returns to the states.