Wayfair – Where Are We Now?
Since the U.S. Supreme Court decision in South Dakota v. Wayfair last June, there have been numerous questions raised regarding how this decision will impact businesses. The U.S. Supreme Court ruled that taxpayers no longer need an in-state physical presence to create sales tax nexus. States can now require an out-of-state seller to collect sales or use tax on sales to customers in that state, even though the seller lacks an in-state physical presence. Essentially, having in-state customers can be sufficient to trigger economic nexus. For additional background information, specifics of the case and the initial reactions following the decision, please see our update from June 2018.
How does this decision impact your business?
The impact this case could have on a business is potentially far-reaching. Many businesses are unaware that this case and economic nexus applies to them. For example, it is a misnomer that this decision only applies to online retailers; this decision applies to any businesses that delivers a taxable product or service into a state that has adopted the economic nexus provisions.
In light of this decision, it is important for all businesses to review their multi-state activities to determine where they may have triggered nexus, either physical or economic. In addition, if nexus has been triggered businesses should consider the following:
- Is their product subject to sales/use tax in the new state(s)?
- If yes, is the business equipped to determine the proper tax rates?
- Is the business equipped to maintain the applicable exemption certificates?
What should businesses avoid doing?
A business should not automatically complete a state registration without evaluating prior risk and whether they may have previously triggered nexus. Such registration would likely keep them from being able to participate in any voluntary disclosure programs, which can reduce and settle past exposures. A business should evaluate all options for becoming compliant before starting the registration process.
How have businesses been impacted thus far?
When businesses evaluate their potential nexus across all states, they often discover that they have previously triggered nexus in a state because of a physical presence. This physical presence can be a traveling sales person, independent sales representative or contractor, trade show attendance, etc. This leads to an evaluation of the potential for past sales or use tax liability and a discussion of the options for becoming compliant (e.g., voluntary disclosure program).
Some states are also sending notices or questionnaires to potential taxpayers. For example, the states of California and Washington have recently sent questionnaires to several businesses about potential nexus. The purpose of these questionnaires is to determine whether there was any physical presence in the state prior to the Wayfair decision, which would lead to prior sales/use tax exposure. In addition, once the questionnaire is received, the business is likely not eligible to participate in the voluntary disclosure program, which means the lookback period would not be limited and could go back to when nexus was first triggered, and the liability could be subject to full interest and penalties.
Fully complying is truly a burden to many businesses due to the complexity of the administration of the sales tax. In a recent nexus review project, we determined that the client had economic nexus in more than 30 states, but only 5 percent of the client’s transactions were retail transactions subject to tax. The sales tax on those transactions was de minimus. The amount of sales tax owed to all states over the course of one year was substantially less than the cost to administer the sales tax (e.g., cost of software to get the applicable sales tax rates, cost to hire staff to file the returns).
Questions have also been raised regarding how the Wayfair decision will impact other tax types, such as income tax. There has been some discussion surrounding this topic, however, for sellers of tangible personal property, P.L. 86-272 is still applicable and will not be impacted by economic nexus.
Economic nexus may impact financial reporting requirements. A business will need to evaluate how economic nexus could impact existing tax positions and determine whether there are any liabilities that need to be reported in the financial statements.
Finally, a business should evaluate how this could impact successor liability – this would apply to both the seller and buyer side of a transaction. During an acquisition, the buyer will want to minimize successor liability for any unpaid taxes, including sales and use taxes. The seller is typically required to request a tax clearance from the state during the acquisition process, however this may be difficult to achieve if the seller is not compliant with the applicable taxes.
How can we help?
Brown Smith Wallace can assist with a multi-state sales/use and state income/franchise tax nexus review, which will help determine which state(s) a business may have created nexus and, if applicable, the effective date you triggered a filing requirement. We can provide management with a high-level assessment of potential sales/use or income tax risk or opportunities and assist in addressing these issues.
For more information, please reach out to Amy Jackson, Tax Manager, at firstname.lastname@example.org, Bernie Ottenlips, Tax Principal at email@example.com, or Pam Huelsman, Tax Principal at firstname.lastname@example.org.