Assessing Your Wayfair Tax and Compliance Risk
On June 21, 2018, the U.S. Supreme Court issued its widely anticipated decision in South Dakota v. Wayfair[1]. The Court held that states may require a business to collect and remit sales and use taxes even if the business has no in-state physical presence.
The Wayfair decision means that states can subject businesses to state taxes based on an economic presence within their state, as opposed to a physical presence standard utilized for many years. Overnight, remote sellers, licensors of software and other businesses that provide services or deliver their products to customers from an out-of-state location may have to start complying with state and local taxes. The Wayfair decision also supports states that subject out-of-state businesses to income taxes based on economic “factor-presence” nexus statutes that some states have enacted in recent years.
States’ Economic Nexus Statutes
While some states’ economic nexus statutes have been in place since 2016, many more states have enacted such statutes since the Court’s decision, with effective dates as early as July 1, 2018 and continuing through 2019. These statutes impose nexus based on a company’s activity within the state in terms of number of transactions or sales volume, and they vary in form from state to state. Thus, enforcement will be uneven across states, pending further administrative guidance. The number of states that adopt economic nexus statutes is expected to grow quickly in the months to come. For more information, see the AICPA’s maps that detail expanded nexus provisions and remote sales tax enforcement dates.
Measuring Your Tax Risk Related To Wayfair
Wayfair has implications reaching beyond sales tax nexus—from the impact on state and local tax consulting, compliance, tax provision and accruals (ASC 450 and ASC 740) to likely increased exposure for businesses involved in mergers and acquisition transactions. Wayfair also impacts companies’ data needs and Enterprise Resource Planning (ERP) systems to properly report their state taxes.
Here are a few initial assessment points to help companies determine how they might be impacted:
- Does your company make sales into states in which you are not registered or filing sales/use tax returns?
- Does your company ship goods or provide services to customers located in states where you have little or no in-state physical presence?
- Does your company make retail sales of tangible goods?
- Does your company provide online services or make sales of digital goods?
- Does your company file sales/use tax returns in every state where you ship or deliver goods or services?
- Has your company received a nexus questionnaire or received audit or tax notices from any state where you are not currently registered for sales/use taxes?
- Are the exemption certificates you have obtained from customers generally more than a year old?
If the answer is “yes” to any of these questions, your company is likely impacted by Wayfair. Please reach out to Colleen Aldridge, a State and Local Tax Manager at Warren Averett, or your Warren Averett service team for further assistance in assessing risk and action steps to minimize potential exposures from tax, interest and penalties that could apply.
[1] 585 U.S. ___ ; 138 S. Ct. 2080; 201 L. Ed. 2d 403
