Supreme Court ends term with two key tax decisions
We spend the vast majority of our time unraveling the complexities of payroll law. But sometimes it’s good to step out and stretch our intellectual muscles by delving into other areas of tax law.
Let’s take a break from the never-ending saga of tax reform to consider what the Supreme Court did last week.
Quill is dead, long live Wayfair
Unless a retailer has a physical presence in your state, you don’t pay sales taxes when you buy something over the internet or through a catalog. (Are there catalog sales anymore?) You’re supposed to pay state use taxes, but, let’s face it, no one does and states don’t really have any mechanism to enforce their use-tax rules. This physical presence test grew out of a 1992 Supreme Court case—Quill Corp. v. North Dakota.
Last week, however, the Supreme Court issued its opinion in South Dakota v. Wayfair, Inc. (No. 17-949). It tosses Quill’s physical presence test out the window.
The court said Quill had become unwieldy in the age of internet sales. States and brick-and-mortar retailers were losing millions of dollars in taxes and revenue, respectively, because internet retailers didn’t have to add sales tax to their customers’ orders.
Under Wayfair, states may require out-of-state retailers to collect sales tax on items sold in their states, regardless of whether those retailers are physically present in that state. There are some unanswered questions, like whether is there a de minimis threshold below which a state cannot mandate sales tax collection, but, thankfully, those questions aren’t for us.
So aside from you (and the company) maybe having to pay sales taxes on your online purchases, does this case affect your liability to withhold income taxes from wages paid to employees who work interstate? The good news is not really.
States generally set their income tax and withholding rules separately from their sales tax rules, although you must still be physically present in a state before that state can require you to withhold its taxes. You can be physically present in a state through the actions of your employees, even if you don’t have an office in that state. For example, Connecticut allows out-of-state employees to work there for up to 15 days a year before out-of-state employers become liable to withhold Connecticut income taxes.
Other states require withholding from the first day an employee sets foot in it. But you can see the problem with this right away—again, there’s no real mechanism for a state to enforce its income tax and withholding rules, especially if an employee is in a state for a short period of time, say, to attend a conference.
Stock isn’t money
Private railroads seem to exist in their own little tax universe. For example, there’s FICA, which every employee and employer pay, and then there’s the railroad retirement tax, which operates much like FICA, with the same tax rates and wage bases. Who pays it is pretty self-explanatory.
Unlike FICA, however, this tax reaches only cash remuneration. So the question for the justices in Wisconsin Central Limited v. U.S. (No. 17-530) was whether cash remuneration includes stock. It ruled it does not, even though stock can easily be covered into cash.
So the good news is that payroll dodged a bullet this Supreme Court term. The bad news is that we may not be so lucky next term.