ETA Expert Insights: Key Takeaways on State Sales Tax From a Regulatory Perspective

By Theresa Y. Kananen & Edward Marshall, Arnall Golden Gregory
ETA Payment Facilitator Committee

Theresa Kananen and Edward Marshall of Arnold Golden Gregory LLP (AGG) led a roundtable discussion at ETA’s Payment Facilitator Committee on sales tax and how payment facilitators and marketplaces can approach the interpretation of state laws. Until 2018, sellers had to have a physical presence in the state to order to be taxed. However, after the South Dakota v. Wayfair ruling by the Supreme Court, which stated that state tax laws are no longer limited to physical presence, taxing and reporting became much more complicated for marketplaces. Furthermore, with states looking to increase revenue after the pandemic, we can predict that that they will be looking for more gray areas in the payments ecosystem to tax (e.g., payment facilitators). Below are the takeaways from the committee’s discussion:

1. The Supreme Court does not issue tax laws. It makes decisions based on state tax laws created by a state authority. How a term is defined will determine what is taxable as well as how the tax is calculated.
2. A previous ruling in the case Quill v. North Dakota (1992) required that sellers must have a physical presence in a state for the government to subject them to the sales tax of the state. The South Dakota v. Wayfair (2018) case opened a big door by ruling that tax laws are no longer limited to physical presence, which leaves billions of dollars of revenue for states to collect. Instead, only a “substantial nexus” with a state is needed for sales tax to be collectible. With 50 states and 50 different tax codes to follow, this law has become a headache for marketplaces and payment facilitators to enforce.
3. State regulators have started to target companies outside of traditional sellers and marketplaces to find the substantial nexus requirements to tax them (such as PayFacs). Payment facilitators are among those in the crossfire. Regulators have come up with varying, broad definitions of marketplace and payment facilitators to make the net bigger and capture more revenue. Forty-three states and the District of Columbia have made new laws to take advantage of the South Dakota v. Wayfair ruling.
4. Individual sellers on a marketplace will not reach the minimum threshold to be taxed, but the marketplace (and marketplace facilitators)

Interested in joining the committee? Over the past year, we have worked to harness the collective expertise of ETA and its members through our committees to help navigate industrywide opportunities and challenges. In conjunction with ETA’s Payment Facilitator Committee, for example, we released the third edition of the ETA Payment Facilitator Guidelines to help our members mitigate risk in U.S. card acceptance. The revised document includes updates related to COVID-19, ecommerce, privacy, compliance, graduation of submerchants, and enhanced review of certain marketing practices.