Private Equity’s Retail Portfolio Companies Adapt to the Wayfair Decision

Written by Scott Hendon and Rocky Cummings on August 16, 2018

Warren Averett Private Equity Wayfair Decision Image

As if competing against online retail giant Amazon wasn’t enough of a challenge for retailers, they, and in many cases, their private equity owners, will have to pass another test.

In its South Dakota v. Wayfair decision, the U.S. Supreme Court granted states greater power to require out-of-state retailers to collect sales tax on sales to in-state residents. Now, retailers of even modest size that sell goods or services to customers across state lines will need to comply with states that have “economic nexus” standards that require sales tax compliance in states where customers are located.

It may also exacerbate an already declining trend in private equity firms investing in nonfood consumer targets. In the second quarter of 2018, private equity firms made 21 deals worth $4.7 billion, down from 35 deals worth $15.3 billion in the second quarter of the previous year, according to data from Mergermarket and White & Case.

From a consumer perspective, shopping may become more expensive at these online retailers, causing them to reconsider their loyalty to their favorite online stores. After all, 51 percent of consumers consider how much they are charged in sales tax before placing an order online, according to BDO’s latest Consumer Beat Survey.

Private equity firms’ retail portfolio companies, as well as PE firms looking to acquire retailers, will need to determine whether Wayfair’s impact on their business is large enough to sway a potential investment or current business operations. If a retailer derives a substantial amount of receipts from customers in states that have adopted an economic nexus standard, will the financial impact of Wayfair be significant enough for the retailer to consider adjusting its market strategy? PE firms will also need to factor into their investment decisions the administrative burden and compliance costs that will result from having to file in more jurisdictions. Luckily, PE firms still investing in the consumer and retail segment and their portfolio companies have options to adapt to the changes the Wayfair decision brings.

AN ADDED TAX BURDEN FOR RETAILERS

With the Wayfair decision, each state must determine its respective sales and use tax economic nexus threshold that will require companies to collect this tax. Prior to the Court’s decision, over a dozen states were already deriving receipts from customers that had made purchases from out-of-state sellers. States that are considering adopting an economic nexus standard, such as Texas, are slowly determining the sales or transaction volume threshold for sales tax requirements.

Tens of thousands of businesses will also likely be required to file in new jurisdictions where they sell their products. But there are many solutions they can implement to ensure compliance: Businesses could administer the compliance either through online marketplace vendors providing the services themselves, or through a partner. In some cases, they could outsource the sales tax function.

This decision doesn’t only impact U.S.-based vendors. Retailers located outside the U.S. that sell goods or services to customers within the states will now be required to collect sales and use tax.

THE ROAD TO COMPLIANCE

Retailers that understand how their products are sold throughout different states will be best prepared to comply. Those that don’t will need to quickly create a system that tracks this activity. There are various steps companies can take to prepare.

These include:

  • Communicating the changes to internal and external stakeholders.
  • Maintaining or investing in an accounting or billing system that can handle multi-state and local sales taxes.
  • Identifying which potential sales, use, and state income tax liabilities the company may be exposed to, including both past and present liabilities.

NEW RULES AHEAD

Following the Wayfair decision, several states have embarked on writing up new rules on the taxation of out-of-state businesses that sell to their residents. They must, however, abide by two key limits:

  • States may not treat out-of-state retailers worse than in-state retailers.
  • They may not impose undue burdens on interstate commerce.

While the full impact of the Wayfair decision has yet to be determined, retailers and their private equity owners should begin considering potential options and strategies to comply effectively.

Warren Averett is an independent member of the BDO Alliance USA. This article was borrowed with permission from BDO USA, LLP.

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