By Mary Jane Pieroni, Director, BDO USA, LLP and Stephen J. Lenivy, Manager, BDO USA, LLP
On June 21, 2018, the U.S. Supreme Court issued what was likely its most significant state tax decision in more than 50 years. The ruling, South Dakota v. Wayfair (referred to as “Wayfair”), holds that states may require a business to collect and remit sales and use taxes even if the business does not have a physical presence in the taxing state.
What does this mean? Bottom line: Consumers can expect to pay sales tax on many of their out-of-state online purchases. But it has significantly broader implications for companies selling in multiple states. Many states will now require businesses to charge and remit sales and use taxes based on an economic presence within their state, a concept referred to as “economic presence nexus.” (Previously, physical presence was required). Businesses that don’t comply with the states’ economic presence nexus rules will be liable for the sales tax they should have charged their customers and remitted, plus interest and penalties. The ruling also means that states may subject out-of-state businesses with an economic presence in their state to pay income taxes on income generated within the state.
“Wayfair is a ‘game changer’ that dramatically increases the number of states where businesses will be subject to state taxes,” says BDO Partner Rocky Cummings. “Companies that fail to comply in states with economic nexus provisions will be exposed to potentially significant tax, interest and penalties.”
COMMONLY ASKED QUESTIONS
Do the “physical presence” rules still apply?
Yes, sellers should evaluate their sales/use tax administration responsibilities under both the new economic nexus thresholds and the long-standing “physical presence” standards. For example, a seller may lack an economic nexus by reason of having sales and transaction volume below the state’s statutory thresholds, yet be required to administer sales/use tax by reason of having an in-state physical presence.
Sellers should note that physical presence nexus over the years has grown to include not only in-state employees (including nonresident/visiting) and property, but nexus may also exist through the activities of affiliates, “click-through,” “cookie,” and most recently marketplace facilitator nexus. Please note that traditional physical presence nexus rules should still be monitored.
Of course, if a state has enacted an additional economic nexus rule, then a company should monitor its sales and transaction volume to see if the economic nexus thresholds have been reached.
Does Wayfair impact only online website transactions?
No, all remote sellers who ship or deliver goods or services across state lines may be impacted by Wayfair.
In light of Wayfair, will drop shippers (wholesalers) still be potentially required to administer sales tax in certain states?
Yes, wholesalers may be required to administer sales taxes on sales shipped or delivered to a state where the wholesaler has nexus (physical or economic) if the wholesaler does not collect a valid resale certificate from the retailer. However, we anticipate that in light of Wayfair, more remote sellers will register for sales/use taxes and, as such, wholesalers may be able to more easily collect a valid resale certificate from their customer, the retailer, who directs them to drop ship goods to the retailer’s customer. Wholesalers may now also incur business taxes in states where they have an economic nexus only.
Some states sales/use tax laws do not impose a filing requirement if a seller is not making “retail sales of tangible personal property.” Other states laws require a vendor to register if the seller is making sales of any retail sales of tangible personal property. Furthermore, some states may impose a penalty for failure to file sales/use taxes, even if the tax amount due is zero. It would be prudent to file sales/use tax returns to start the statute of limitations for assessment, which reduces financial risk.
Is there a generic form to use for sales/use tax reporting?
No, each state has its own unique sales and use tax returns.
Is there any technology to help us manage tax rates and fillings?
Several software vendors provide “front-end” tax calculation solutions and include state and local tax rates for the entire U.S. These applications also have taxability knowledge of many products and services sold by most companies. Regularly updated, these programs lessen the burden on a company from a rate and taxability maintenance perspective. The software does require upfront planning, system set-up procedures, and extensive testing in order to be sure the solution is configured properly.
Some of these vendors also provide tax return preparation software which allows for the generation of signature-ready tax returns. Similar to the “front-end” sales tax calculation software, upfront planning, configuration and testing procedures are required, but on a smaller scale. An alternative to leveraging the tax return preparation software solutions is to outsource the return compilation process.
If a company has economic nexus for sales/use taxes in a state, must the company also register for income taxes in that state?
It depends! Even though there may be a “substantial nexus” between the state and the taxpayer, the state income tax statute may not extend to companies with only an economic nexus with the state. Even if it does, federal law may immunize the company from state income taxes. Also, as a general rule, the economic nexus thresholds differ by tax type.
A consequence of the Wayfair decision is that states can apply economic nexus for all tax types, subject to certain federal constraints. State laws must adopt economic nexus for it to apply unless an existing statute can be interpreted to support economic nexus.
Prior to the U.S. Supreme Court’s decision in Wayfair, a number of states had already asserted economic nexus based on their existing income tax laws. In addition, as more states have adopted market-based sourcing for purposes of determining the sales factor of their income apportionment formula, companies could now be found to have a taxable economic nexus in a state. We recommend that you consult your tax advisor to determine your state income tax requirements.
Complying with the tax requirements created by the Wayfair decision can be complex. Many states are enacting new laws and regulations based on the Wayfair decision. Please consult The Impact of Wayfair to review the latest alerts, insights, and webinars. The website also features an interactive map of the U.S. with economic nexus statutes for state sales and use tax that enables you to click on a state to see the latest threshold and enforcement dates. (The website and map are more accessible via Chrome.)