Did the SCOTUS Tax Ruling Nullify ‘Physical Presence’ as a Nexus Standard?

The recent SCOTUS tax ruling may have effectively removed “physical presence” for e-commerce retailers as a nexus standard for collecting and remitting sales and use taxes. This may potentially eliminate one of the most important protections on out-of-state businesses regarding interstate commerce of the past half century.

This is not a legal commentary on the SCOTUS tax ruling, but it may be one of legal remorse where taxation is concerned.

In one of his last acts as a U.S. Supreme Court Justice, Justice Anthony Kennedy undid the clock 51 years in South Dakota v. Wayfair, (opens as a PDF) and authored a 5-4 decision that may have effectively removed “physical presence”  for e-commerce retailers as a nexus standard for collecting and remitting sales and use taxes. This may potentially eliminate one of the most important protections on out-of-state businesses regarding interstate commerce of the past half century.

Why the uncertainty about the SCOTUS tax ruling? Because the court remanded the decision to South Dakota, where the lower court may make further modifications.

What of Taxation Without Representation?

We fought and won a Revolution on taxation without representation, but such tyranny may not seem to count for much where e-commerce is concerned. The National Bellas Hess (1967) and Quill (1992) decisions set and reaffirmed the “physical presence” test that blocked tax collection-and-remittance duties of out-of-state catalog and mail order companies, and their e-commerce offspring. Suddenly, this may no longer provide adequate protection.

The American Catalog Mailers Association identifies many open questions left in this decision’s wake,. Yes, it may have to fall to Congress and a new federal law to sort this all out.

Some tax-hungry states have called this “leveling the playing field.” Hardly. Name me a Main Street retailer who collects and remits taxes for thousands of state and local tax jurisdictions where there is no presence. Yet out-of-state companies, many of them small startups, may have to do just that. And we know how tempting it is to throw tax burdens on outsiders – knowing there are next-to-zero ramifications for doing so. Tyranny.

E-commerce firms today happily collect and remit taxes for jurisdictions where they have a physical presence. They receive a multitude of government services, and they have elected voice through direct representation in those governments. Every e-commerce firm in every state currently collects such taxes from in-state residents. So now we are really going to abandon this wise rationale for distributing tax collection burdens?

Other out-of-state businesses may make a business decision to collect and remit such taxes in states where they are not located. They may anticipate business growth or supply chain relationships that may extend to those other states. Yet, that is a decision as a business – not one mandated by a far-away government or a group of justices bending with the wind.

Interstate Commerce: Ladies and Gentlemen, Watch Your Wallets

As consumers, yes, we are currently responsible for self-reporting our out-of-state purchases, subject to sales taxes, and paying these taxes ourselves where we reside. We are supposed to do this through our state income tax form filing each year. (Interestingly, nearly 90% of business-to-business transactions are compliant, ACMA reported.)

So get ready to open your wallets, because if you haven’t been paying those taxes yourselves now – an e-commerce (and catalog) company may be forced to play state and local tax collector far beyond Hometown, USA. For those businesses in e-commerce, please stay tuned: The focus may turn to the legislative sector and lobbying for relief. In the meantime, it might be prudent to start researching tax collection software, while also devising creative and new non-nexus theories, because taxation without representation doesn’t appear to be one of them anymore.

Why Don’t Millennials Use Cash?

When’s the last time you saw a Millennial pay with cash? Even convenience store purchases of less than $5 are paid with a debit card. Coffee in Starbucks is paid via cell phone. Money is exchanged between friends using PayPal and Venmo.

As I paid a dinner check, my Millennial daughter affectionately quipped, “You old people and your cash!”

My response was, “Everybody likes cash!” I was wrong of course, (and perhaps prejudiced by my South Philly roots, where some businesses are still “cash only” for one reason or another).

When’s the last time you saw a Millennial pay with cash? Even convenience store purchases of less than $5 are paid with a debit card. Coffee in Starbucks is paid via cell phone. Money is exchanged between friends using PayPal and Venmo.

Many of the Millennials I give birthday gifts to prefer gift cards to specific retailers, like Home Depot or Banana Republic, rather than cash that they can spend anywhere.

A survey by TD Bank of 1,300 Americans, reported in ABA Bank Marketing last month, found that 25 percent of Americans either currently use or have used a reloadable prepaid card in the past two to three years. But among Millennials (ages 18 to 34), this proportion jumps to 33 percent. According to FICO, more than one-third of Millennials are expected to use a mobile wallet in 2015. (Opens as a PDF)

Professor Bernardo Batiz-Lazo of Bangor University, Wales, speculates that Millennials’ predisposition for non-cash transactions could eventually result in the demise of ATMs. His blog post reprinted by Newstex last month states:

“Perhaps the biggest issue shaping ATMs in the near future will concern the choices of Millennials, those for whom the Internet, mobile phones and plastic cards are a fact of life, checks are unknown and cash is quaint. They challenge financial institutions and their business models to do more, faster because they have easier and faster access to better technology than offered by the banks’ legacy systems through the multitude of apps on their smartphones, wearables, tablets and elsewhere. Left to their own devices, Millennials could spell the end of the ATM by 2035 or thereafter.”

Now of course the use of electronic payment methods is not limited to just Millennials. Boomers and Silents are also moving away from cash transactions, but Millennials are certainly leading the charge. If your business requires a minimum purchase to use a card, you’re probably losing customers among the largest demographic group. Millennials represent 24.6 percent of the population vs. 23.3 percent for the Baby Boomers.

I’m waiting to see the first panhandler with a card reader. Let me know if you spot one.