Sales tax: Nearly 4 years after Wayfair, what’s on the horizon

Hosted by Neil Amato

Sales tax compliance is complicated and ever-changing. Diane Yetter, CPA, the president of Yetter Tax and the Sales Tax Institute, shares knowledge on the current landscape related to several sales tax topics. Hear or read the discussion on compliance since Wayfair, how some states are supplying resources to automate sales tax compliance, and advice for remote sellers when considering sales tax risks.

Also, hear more about the AICPA's role in pointing out taxpayer frustration to the IRS, more on IRS procedures for employee status determinations, and audit committee members' opinions on audit quality.


AICPA State and Local Tax Guide (member content)

AICPA Wayfair resource page (free) and Wayfair client notification letter (member content)

What you'll learn from this episode:

  • Which aspects of tax constitutionality the Supreme Court's Wayfair decision did not address.
  • Some of the resources available to businesses to help ensure sales tax compliance.
  • A look at how some states have responded in the wake of Wayfair.
  • More on a recent Louisiana policy and procedure memo related to sales tax penalty waivers.
  • Why Yetter says the sales tax area is "an exciting, fun place to be."

Play the episode below or read the edited transcript:

To comment on this episode or to suggest an idea for another episode, contact Neil Amato at


Neil Amato: Hi, this is Neil Amato with the Journal of Accountancy. This episode of the JofA podcast features an interview with Diane Yetter of Yetter Tax and the Sales Tax Institute. Diane is a CPA who I had the opportunity to speak with in December. Special thanks to my tax colleagues at the JofA for help with the questions for Diane. Here's the interview.

In the Wayfair opinion that overruled the physical presence standard and allowed economic nexus for sales tax — that's the South Dakota case [South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)] — Justice Anthony Kennedy wrote that small businesses with only de minimis contacts with the state that are burdened by the decision might seek Commerce Clause relief "under other theories," but he didn't elaborate. Has that happened? If so, how? If not, why not?

Diane Yetter: That's a great question, Neil. One of the things that a lot of people don't realize is that we've got a fairly old case from 1976, the Complete Auto case [Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)], that defined the four-pronged test that is used to determine whether or not a tax is constitutional. Substantial nexus is only one of those four prongs, and that's what the Wayfair decision focused on.

There's actually three other prongs that could be looked at, and those are fair apportionment, nondiscrimination against interstate commerce, and a fair relationship to the services provided by the state in exchange for the tax revenue that the state is requiring the business to collect. What Justice Kennedy was alluding to is evaluating whether or not those other three prongs actually were met.

The case, if you go back to all of the very specific logistics, the Supreme Court ruled on the substantial nexus case, and then actually sent it back to the South Dakota Supreme Court to potentially address these other three prongs. However, that never happened. It happened because there was a negotiated settlement and the law got slightly changed and South Dakota went ahead and moved forward with enforcing their provisions.

When we think about what are those other three prongs and which of them are most likely to have a challenge would be really that nondiscrimination against interstate commerce. We haven't had anything happen, but there has been a lot of supposition that this would happen in Illinois. Jan. 1, 2021, Illinois made some changes to their rules for remote sellers.

They enacted a bill that's called Leveling the Playing Field [Ill. Public Act 101-0031 and Ill. Public Act 101-0604]. This switched the tax collected by remote sellers from the use tax, which was only the state rate of 6.25%, to the retailers' occupation tax or sales tax that requires collection of state and local sales tax instead of use tax. That actually puts out-of-state sellers at a significantly higher burden because in-state sellers — Illinois is an origin-based state, which means if I'm a seller and I'm located in Chicago — regardless of where in the state I send to, I collect 10.25%.

That happens to be a fairly high rate, but it's a very low burden because I only have to know the one rate. But if I'm a retailer in Springfield and I sell to anywhere in the state, I only have the 6.25% rate.

Now consumers in Illinois that buy from a Springfield in-state vendor are charged 6.25%, but if they buy from a remote seller out-of-state, and they happen to be located in Chicago, they are going to be charged 10.25%. That violates that [nondiscrimination against interstate commerce] prong. Therefore, there has been a lot of supposition that there will be something there.

The other case that just got filed is a case against Louisiana. This just got filed a couple of weeks ago. It's the Halstead Bead case [Halstead Bead Inc. v. Lewis, No. 2:21-cv-02106 (E.D. La. 11/15/21) (complaint filed)]. It was actually filed in the federal courts. That is a case that is filed under a violation of due process and an undue burden [on interstate commerce] because of the very, very burdensome responsibilities under Louisiana, with all of their home-rule localities and crazy boundaries that exist there.

Just got filed mid-November, so we'll have to wait and see if the federal courts take it and what happens, but those are probably the two most likely challenges that I've seen.

Amato: Good points on all those. And, yeah, we'll make the point to the audience that we are recording December 7th. Obviously some of these things can change, but we'll keep this somewhat timely and also looking ahead.

A number of third-party software companies offer a sales tax compliance API, or application programming interface. But so far, California appears to be the only state offering API documentation that looks relatively complete, free, and open-source. Why, three years after Wayfair, or more than three years, aren't more states doing things like that to make automation easier?

Yetter: Well, California is actually not the only one. The first thing that we need to think about is the streamlined sales tax states. There are 24 states that have been part of the Streamlined Sales Tax organization now for over a decade. And part of being a member state of Streamlined is that you are required to provide, at no cost and available on your website, information about tax rates, tax boundaries, and taxability of what your tax rules cover. That's all provided free.

Now, it is all available in different formats. I believe all the Streamlined states do offer some sort of downloadable file in the format. Is it a direct interface like the California one? Maybe, maybe not, but it is available free. Other states that have something similar to California would be Illinois. They actually do have a way that you can connect in with that. Then probably the most recent one that has come up is through Colorado with their sales use tax system, or SUTS.

Those are different programs that are out there. But in terms of free, Streamlined as part of their program have partnered with a couple of the software companies. There are four companies that are referred to as CSPs or certified service providers, that if you are a remote seller, if you meet certain criteria, and you use one of those providers, then all of their software functionality in the states where you qualify is all free to the user.

There are four providers out there, Avalara, TaxCloud, Accurate Tax, and Sovos. Those four providers all provide that at no charge.

Now, a comment about California and why not other states? Companies can't really interface more than one tax solution into their selling systems. Although there has been discussion about, well, why don't you have each different state provide their own? Companies can't integrate 50 different or 47 different, which is what we really have with the number of states with sales tax. Using a solution like one of the CSPs or other software companies that you might have to pay for or having your own system and bringing in rates are really the viable options that are out there.

Amato: Some states have enacted an economic nexus threshold based on dollar volume only. Some others that had that dual threshold or similar one have repealed the transaction threshold. In a state with just a $100,000 threshold, I could sell 19,999 $5, I don't know, rubber ducks in individual transactions and still not incur sales tax. So why would states allow, or even in some cases create, that loophole?

Yetter: I certainly wouldn't refer to that as a loophole. The reason why is, even if we think about $100,000 of sales at a very high tax rate of 10%, which is fairly rare. We're still only talking about $10,000 in tax. Some of the states are at 6, 6.5, 7 [percent]. Seven thousand dollars of tax incurs a significant, or can incur, a significant compliance burden on companies. If we go to the states that, say, 200 transactions, and we use your same $5 rubber ducky example, that's generating only a $1,000 worth of sales, which at 10% is only $100 [tax] over the course of the year. That is extremely burdensome.

I am actually a big proponent of the states that enacted legislation without any transaction threshold and those that are dropping it. Maine will be the newest one that's dropping their transaction threshold. Starting Jan. 1, 2022, that is going away. Maine was one of the very first states to be effective back in July of 2018. They gave us all of seven days to become effective, and they are now wising up. I think they have probably the longest duration of experience in seeing what kind of tax dollars are coming in, and I believe even the states have said, "This is ridiculous. We are processing tax returns for $10 a month." It costs the states a lot of money to process those small tax returns. We have definitely seen those changes.

Some of the other things that come into play when we're looking at the thresholds is what types of dollars are included. Are they your gross sales? Are they excluding sales for resale, or do they even exclude all exempt sales? A state like Arkansas that exempts all sales and you only base it on your taxable sales helps make it so that companies that have a significant volume of nontaxable transactions for whatever reason may not need to get registered.

The other part that goes into the threshold calculation for marketplace sellers in particular are whether or not you include or exclude those marketplace sales. If you're selling on a marketplace platform like Amazon, do you include those sales or exclude them? All of those things go into helping to determine what is the threshold in each individual state. If you want to see all of those different rules, we have a great chart, our economic nexus chart on

We have all of those very specific rules. We have the changes that happened, so the states that dropped thresholds or changed their dollar amounts, all of that information is right there on our chart.

Amato: Some remote sellers might want to take a preemptive approach to sales tax registration, registering in a state, even if they're not quite sure they have nexus. But does that carry risks, too, of the state looking more closely at the company than it might otherwise? I guess, where do you strike the balance there?

Yetter: We help clients look at that balance and try to make that decision, and a couple of the factors that we look at is whether or not they have resources, internal resources, or system resources to help do that tracking. There are companies that are close. We often recommend if you're within 75%, 80% of the threshold, you might want to go ahead and get registered. You might start that process in the middle of the month and, say you're going to be registered as of the first of the next month, just so you can be timely in doing that.

But we have other clients that for a variety of reasons, whether it's because they don't want to track it, they don't want to be in the business of tracking. Or I've got a client that is a brand new business, starting out the gate. They want to not create customer user experience frustration by starting out because it's a subscription business, I'm going to start out and for the first X months. I'm not going to be charging you tax, but then when I hit the threshold, I'm going to start charging you tax. It's a recurring monthly subscription. Users like knowing exactly what their credit card is going to be hit.

In that case, they're saying we're going to start on day one and collect in every state where what they sell is taxable. There's a lot of different reasons why companies may want to wait or start. We have a lot of companies because those thresholds are often determined on a calendar-year basis. If we're getting very close to the end of the year and we're looking at it and they are at 75%, we may say, "Hey, if you have the option, because you don't want to start collecting, if you can, move sales to the beginning of the next year. Now you may not hit the threshold within this calendar year and you start over at zero at the beginning of the next measurement period." With all of those different factors, we help companies figure out what is best for them.

Amato: For those really small businesses, a sole proprietorship with a few thousand dollars a year in sales, what are some of the best low-cost or free compliance resources?

Yetter: Well, the first thing that you need to really focus on is those really teeny, tiny sellers may not have to worry about anything other than their own home state because they're probably below those thresholds. In that case, what we see is those really small sellers that only have to deal with one state because that's the only place that they had physical nexus, they may actually do it manually. They may put the tax rates that they need or if they're in an origin-based state like Illinois, I only need to know my specific city location. They may just put that into their QuickBooks or their Sage or their shopping cart.

In that case, that is what I see most of those really small sellers doing. In terms of the compliance piece, because so many companies that are that small, it really isn't very complicated to go in and just fill out your sales tax return online. That's how most of the states have you do it today, is you get an online log on to the state website, you go in, and you populate that return.

However, there are some other smaller — TaxJar would be one, TaxCloud — are some of the smaller ones that are out there that are typically a lower price point. But at the same time, don't forget about those streamlined options that we talked about earlier, that it is free if you are considered a remote seller, and so that is a way that we've actually seen some of these smaller sellers say, "I'll go ahead and voluntarily register in the streamlined states because it's going to be zero cost to me to go ahead and collect in those states."

Amato: Other states have laws requiring sales tax collection by "marketplace facilitators." What are those, generally speaking, and what should they know and do?

Yetter: Every state now has passed both economic nexus provisions as well as marketplace facilitator collection requirements. The only state that is not currently effective is Missouri, which will be effective Jan. 1, 2023. But what the marketplace facilitator provisions are: Think of marketplaces: Amazon, eBay, Etsy, Uber, Airbnb, DoorDash. Those are marketplaces.

What marketplace facilitators do is they provide a platform where individual sellers can come and offer their goods or services for sale. But the facilitator processes the transactions. What the states have said is instead of having each individual seller have to remit that tax, they look to the facilitator to say you're responsible for remitting on behalf of all sellers. This is where we saw Washington was really the first one that became effective in January of 2018.

In that case, a company like Amazon started collecting tax on all Washington sales, whether they were made directly by Amazon or by any of the tens or hundreds of thousands of sellers if they went into a Washington customer. However, in my home state of Illinois, that didn't become effective until January of 2020. However, economic nexus became effective Oct. 1, 2018. In that in-between period, Amazon would collect tax on its direct sales. If I bought something directly from Amazon, they started collecting earlier, but if I bought from a seller that was located in Illinois, they would probably charge me tax, but if I bought from a seller located in a different state, they wouldn't.

I had a very uneven or varied experience because sometimes I'd get charged tax and sometimes I wouldn't and I wouldn't know why. The state said, let's move this responsibility to the facilitator that also then removed a significant burden from a lot of those smaller sellers. That has widely been seen as a very positive action by the states because anybody that is strictly a seller on platforms now may not need to be registered at all, except in the state of Missouri.

Amato: California reported $111 million in sales tax revenue from cannabis businesses just for the third-quarter of 2021, along with another $211 million in excise and cultivation taxes and over $3 billion in those taxes since January 2018. To what extent should we expect revenue to drive cannabis legalization going forward?

Yetter: I'm not a cannabis expert, but here's Diane's opinion on the matter. Cannabis legislation is first and foremost a policy decision, not a tax decision. There are certainly tax benefits that come along with legalization of cannabis, but I think the first question that always needs to be asked is, does the state want to legalize marijuana? If it is a state that does not want to legalize marijuana, it is going to be hard for even the tax benefits to push the state into that. In fact, if you look at other sin taxes — alcohol, tobacco — you see a range of the implications of that. If you go to the South, to the tobacco-growing states, the taxes on tobacco products are very low.

If you go to states that really are attempting to discourage tobacco use because of health costs and the desire to decrease smoking, you see taxes being very high. You do see states manipulate tax rates on "sin" types of items based on what their public policy, health policy stance is. Interestingly, as you look at where are the states that have legalized marijuana, it's predominantly in the West and the Northeast. There are none in the South, none in the Southeast, and the only two states in the Midwest that have legalized it are Illinois and Michigan.

When you look at that, you can see that they are much more liberal states that are legalizing marijuana and the more conservative states are not. Certainly, tax benefits can help, but I think states aren't going to legalize marijuana if the overall policy and belief system of the state is to not encourage that type of activity. That's where I think you need to look.

Amato: You mentioned Louisiana earlier, we're going to come back to them for this last question. The Louisiana Sales and Use Tax Commission for Remote Sellers recently issued a policy and procedure memo on sales tax penalty waivers listing 13 factors that include level of cooperation with auditors, previous compliance record, and complexity of the tax issue. How should sellers best position themselves to obtain such a waiver? That PPM, the policy and procedure memo, says it does not apply to waivers relating to a voluntary disclosure agreement. So where should an agreement be sought instead?

Yetter: Let's level the playing field a little bit. Not to use the Illinois legislation name, but the Louisiana Sales and Use Tax Commission for Remote Sellers is a brand new tax agency. As such, they have to put out all policies and procedures. Every state has provisions, whether it is a statute, a regulation, or a policy memo similar to this, that discusses penalties and what are appropriate reasons for waiver of those penalties. This isn't anything unexpected, it's a new tax agency; they have to put out information about when and why they will agree to waive penalties.

Looking at what they have said the reasons are, some of them are a little bit harsher than what we see in other states. But what we typically see in other states is that there are always reasons due to good cause. One of the things that some states talk about is death of the person or a close family member of the person responsible for filing the tax returns. That usually is a valid reason to claim an abatement of penalties. Certainly, things like audit history — that always goes in — compliance history, how often have you been late? Is this the only time that you've had a late return? All of those factors go in.

In fact, North Carolina, I think this is still the case. They will allow one full penalty waiver in a three-year statute of limitations period and then a 50% waiver on the second one. If you request a third penalty waiver, you get nothing. If the first one you requested to waive a $10 late-filed return and the second one it was another $10 or $20, but then your third one is an audit assessment and you've got a $25,000 penalty, you blew your opportunity to get that $25,000 waived because you used it on that $10 penalty. Knowing what the specific rules are in a state, or in the case like Louisiana with a special commission, is very important as you go in to become compliant with the various different provisions in the state.

Voluntary disclosures are typically an opportunity where a company that has not been registered timely can go in and attempt to come clean, in essence, for back periods. Because this provision only became effective in July of 2020, we're typically not doing a whole lot of voluntary disclosures yet because usually what that gives you is an opportunity to reduce the lookback period, as well as getting things like penalties waived. I think what the commission is doing is basically setting the stage for what are the reasons, and voluntary disclosures typically have completely separate provisions that talk about the benefits of doing a voluntary disclosure and one of the benefits is usually abatement of penalties.

Amato: Diane, this has been really interesting to me. I've learned a lot. Thank you very much. Anything you'd like to add in closing?

Yetter: What I'd like to add is sales tax is an exciting, fun place to be. It has been great watching what has happened over the last three years since the Wayfair decision and how the states have responded to it. It is an area for accountants to make sure that they're on top of because your clients are looking to you to tell them what they need to be aware of. If you are a general practitioner and you're not aware of what's going on, get at least a base level of education so that you can make sure your clients have a base level of compliance.

Amato: Again, that was CPA Diane Yetter. Thanks to Diane for being on the podcast.

In other news, the AICPA and a coalition of organizations representing tax practitioners reiterated their call for taxpayer relief from penalties and other compliance actions, given ongoing Internal Revenue Service problems.

The launch of income tax filing season this week comes with taxpayers already feeling frustration with the IRS over unprocessed prior-year returns and unanswered correspondence, representatives of the organizations said Tuesday. Paul Bonner's Journal of Accountancy article on that topic will be linked in the episode show notes.

Also, the IRS issued procedural guidance recently regarding determinations by the IRS that a worker is properly classified as an employee rather than an independent contractor. The distinction carries significant employment law and tax ramifications, and Paul Bonner's JofA article explains those ramifications, which we will link to in the show notes.

Also, a survey by the Center for Audit Quality and Deloitte shows that despite remote procedures implemented as a result of the COVID-19 pandemic, 98% of audit committee members believe that audit quality either increased or stayed the same in the past year. As pandemic restrictions were relaxed, some auditors continued to use some of the remote procedures that were helpful to them at the start of the pandemic. Ken Tysiac has more on that topic, including a look at what issues rank as top areas of focus for auditors.

For the news articles mentioned, you can find those at This is Neil Amato. Thanks for listening the Journal of Accountancy podcast.