SCOTUS Rules on Landmark Wayfair E-Commerce Taxation Case
On June 21, the Supreme Court of the U.S. (SCOTUS) handed down a ruling against Wayfair, Inc., Overstock.com, Inc. and Newegg, Inc. that carries significant ramifications for remote sales amounting to $460 billion annually. As this decision fundamentally redefines nexus, it may have impact far beyond those of e-commerce transactions. Previously, a company had to have a physical presence in a state to collect sales tax. Now, a virtual presence, or merely meeting certain sales thresholds, suffices.
This ruling overturned a 1992 SCOTUS precedent that had barred states from requiring businesses with no physical presence to collect sales taxes. States now have broad authority to collect billions of dollars in new tax revenue. Perhaps ironically, this historic tax increase comes a year after historic federal tax cuts.
Winners and Losers
Clearly, the big winners here are the states. What amounts to a tax windfall gives them enormous flexibility to close budget deficits, allocate to capital projects and so forth. You could argue that brick-and-mortar-only locations have won by gaining a more level playing field.
E-tailers and others engaging in remote sales transactions have lost in that they may have to make significant investments in technology to capture data for compliance purposes. And, of course, the consumer always bears the brunt of any tax or price increase.
There are several unresolved issues worth keeping an eye on:
- There may be financial statement impacts where companies may need to re-evaluate their FAS 5/ASC 450 accruals going forward. If these companies aren’t set up for filing sales taxes in multiple states, it could possibly be a disclosure issue.
- Sourcing issues, especially for service and technology companies. Which state gets the sale? What about software downloaded electronically? What about services rendered over the internet where you may only have a billing address that may have no relation to where the service is being received?
- Impact on companies not engaged in e-commerce. This decision will likely impact companies that sell to other distributors and/or drop ship via common carrier. Substantial nexus is established when a seller avails itself of the substantial privilege of carrying on business in a state, which can be shown merely by selling into a state. Thus, a manufacturer that sells to a distributor in state A, who tells the manufacturer to deliver to state B via common carrier, now has nexus in state B.
- One positive aspect is that this decision may reduce use tax accruals as more companies will be filing in more states, resulting in fewer untaxed transactions.
- This decision also likely solidifies the states’ positions regarding economic nexus for non-sales taxes, such as income tax and gross receipts taxes.
Companies engaging in remote sales will need to evaluate software and systems to collect tax data and be able to file returns in multiple jurisdictions, which could entail significant investments in technology.
Also, before companies register in a state, they should evaluate any potential prior nexus and exposure for the possibility of voluntary disclosure agreements. For example, they don’t want to just register and then get audited for prior periods.