The Wayfair Sales Tax Ruling -- Surprises and How to Cope
E-commerce vendors aren’t the only ones affected by the U.S. Supreme Court’s recent South Dakota v. Wayfair ruling. In late June, the court reversed a 1992 ruling that a state could only require vendors with a “physical presence” to collect and remit sales tax. The new ruling applies to just about any company that sells across state lines, and has ramifications far beyond merely sales tax and typical e-commerce companies.
While the court’s decision is relatively new, states have been quick to adopt the holding. About 30 states have already said they will follow Wayfair in some way. Learn the ruling’s biggest surprises—and how businesses can cope with these new mandates.
1. Expanded Nexus Definition and Where Companies File
Previously, a business could create sales tax nexus through affiliates, traveling salespeople or consultants, remote employees, inventory in another state, or on-line referral arrangements. Now, in addition to these activities, nexus may be created through purely economic contacts. Merely meeting certain dollar thresholds, or having a certain number of transactions in a state, regardless of the dollar value, can now create nexus.
2. Consequences Beyond Typical E-Commerce Retailers
While the Wayfair decision involved the imposition of sales tax on internet retailers of tangible personal property, its ramifications go far beyond these limited circumstances. Any company that has remote sales across state lines potentially fall within its holding. This includes service companies, software companies (including SaaS), and potentially companies with exempt sales.
3. States May Become Aggressive on Income Tax Collection
Wayfair’s elimination of the physical presence requirement for sales taxes may embolden states to apply economic nexus provisions to other types of taxes as well. Businesses that now exceed the state sales tax threshold may face new income tax filing burdens and liabilities. While many states may be reluctant to retroactively collect sales tax, they’re likely to be less reticent about income tax. After Wayfair, states may seek to enforce economic nexus provisions for income taxes that which some states have had in place for years.
4. Sales Tax Provisions Vary Widely Across Jurisdictions
Over 10,000 different sales tax rates can be found nationwide. Businesses must evaluate whether their systems capture the right sales tax information not only at the state level, but at the local level as well, and whether those systems can accurately invoice, collect, and remit the correct tax. This level of preparedness can be challenging where a business has numerous systems—for example, because of various business lines and acquisitions—or where a business relies on homegrown systems.
5. Businesses Face Potential Audits in Additional States
Because audits are backward-looking, it’s possible a business may not be audited for the current period for several years. Businesses should still brace for this eventual scrutiny, likely by many more states than previously, as a result of Wayfair. While states are likely to audit large companies first, they will gradually shift their focus to smaller businesses. In the interim, states are likely to notify businesses they must file now or get ready to file—so watch the mail.
6. There Will Be More of Everything
Count on more filings, returns, reconciliations, and registrations. With these new compliance burdens, businesses should consider whether to hire in-house tax experts, purchase tax software (to consolidate data feeds and reconcile accounts, for example), or outsource completely to an outside provider. Businesses concerned about costs may be tempted to wait it out. This would be a mistake. If a business is hit with a tax bill and doesn’t pay now, it’ll have to pay later, with interest and penalties.
Don’t Wait Until December
Businesses should first evaluate their overall nexus footprint for both sales and income tax, then assess which threshold (sales or transactions) they are more likely to trigger. Based on an evaluation of prior exposure, a business may register in states currently enforcing some variant of Wayfair, but should do so with care, as states may wonder where the entity has been and ask about other taxes.
Whatever the particulars, businesses should not wait until December, as registrations and filings can take months to complete. Nexus analysis should begin today.
Business Tax Quarterly - Fall 2018