In June of 2018, the U.S. Supreme Court’s ruling on South Dakota vs. Wayfair overturned Quill Corp. vs. North Dakota. The decision established that having a physical presence should not be the only defining factor in creating a taxable presence (nexus) in a state. Economically-oriented measures of what constitutes taxable business activity (referred to as economic nexus) became the new reality in sales and use taxation, and many businesses were unprepared for the speed with which economic nexus gained traction across the country. (Click here for more background about the decision and its implications.)
The swift reaction from states in light of this landmark decision opened the floodgates for new regulations, resulting in many businesses now being subject to sales taxation in multiple states for the first time.
One year after the Wayfair decision, there are only three states that impose a sales tax that have not put economic nexus standards in place, and some states which adopted economic nexus standards early have already made changes to their original standards.
It’s noteworthy that companies faced analyzing and implementing Wayfair in the midst of also understanding income tax reform and new accounting standards. For these reasons, and many more, it is an understatement to claim that year one of Wayfair implementation has been challenging for businesses. Whether your business has already taken steps to implement economic nexus rules or if you are somewhere along the journey to analyze the impact, it’s important to remember that small actions are better than inaction and will eventually lead to the finish line.
We celebrate the anniversary of the decision in this monumental case by sharing some observations from our work in the past year assisting clients and answering questions in the world of Wayfair economic nexus compliance.
Question 1: My business doesn’t have an online presence. Do the economic nexus provisions apply to my company?
Observation: Wayfair economic nexus provisions apply to all businesses with sales in multiple states, including brick-and-mortar stores and e-commerce sellers that did not meet the physical presence standards that have been historically enforced.
The Wayfair decision applies to internet sales, but it also encompasses much more. E-commerce was a driving factor behind the attention that Wayfair has received, but Wayfair actually opened the door for any business to be subject to the resulting nexus rules.
If you’re looking to assess your business activity to determine how Wayfair is impacting your company, a good place to start is answering the following questions:
- Are you selling tangible personal property in multiple states where the company is not currently collecting tax and filing a sales tax return?
- Have you evaluated your sales for the past 12 months in relation to each state’s specific threshold?
- If you did not meet the established thresholds in one or more states during the initial assessment, how are you tracking the company’s progress against the thresholds not met?
The answers to these questions can help you determine if you need to take action.
Question 2: Does economic nexus apply retroactively, or does my business only need to worry about future filings?
Observation: Generally, states are not enforcing retroactive economic nexus unless specifically stated. However, there are two factors to consider:
- If physical presence existed prior to the imposition of economic nexus, exposure may exist if companies are noncompliant; and
- The enforcement dates of many states have already passed, so exposure may exist for that window of time.
With the intense focus on economic presence, it has been easy to forget that physical presence is always the first qualifier for nexus for a company. If a company had a physical presence in a state in the past, but the company was not filing sales tax in that state, the company likely has prior exposure unrelated to Wayfair.
No business exists in a vacuum, and facts will change over time. It is imperative that a company review its nexus footprint with that in mind. Physical presence in a state, even for a short period of time, can create nexus for sales and use tax. Nexus would dictate the necessity of prior sales tax filings in a state, and the economic nexus standards would not need to be applied.
Enforcement Date/Compliance Date Gap
Every state enforcing economic nexus has established a date on which it expected businesses to be compliant with the new rules. The availability of relief provisions to companies unable to comply in a timely manner varies by state.
Question 3: Once my company has become compliant for economic nexus, do I need to do anything else?
Observation: Companies should make ongoing compliance a priority.
While all businesses have limited time and resources, the investment in understanding and complying with these regulations now will lay the foundation for future compliance and is an important investment that all businesses should consider making. Nexus rules aren’t static, and your business isn’t either. For both reasons, businesses shouldn’t consider their assessments of how they measure up to the qualifiers in each state as a one-and-done activity.
The Wayfair ruling impacts every part of the sales process. Review or establish internal procedures related to the sales cycle functions to include revised tasks or functions resulting from economic nexus compliance, such as exemption certificate procurement and the taxability of products and services. Train employees responsible for these revised tasks or functions so that they are equipped to perform their jobs correctly and cut down on mistakes early in the process.
Businesses should understand that there may be risks associated with how you respond to these changes, and it’s not too late to get started.
By properly assessing business requirements and becoming compliant, your company is positioned to move forward and be prepared to address potential state issues and potential state audits. Companies should continuously be reviewing business activity to ensure compliance in the states in which they are active.
What to Expect in the Future
As you know, tax changes are rarely without ripple effects. Even though the initial surge of compliance has been undertaken, we don’t expect the impacts to stop there.
Income Tax Nexus Changes
The Wayfair decision directly relates sales and use tax, but it’s anticipated that state departments of revenue will seek similar compliance opportunities on the economic presence nexus for income taxes. Approximately 15% of states have already established similar types of bright-line tests for income tax nexus, and this activity is expected to increase, either through formal methods (such as legislative and judicial means) or informal methods (such as audit procedures or informal guidance).
Audits for Sales Tax
The number of state sales and use tax audits is expected to increase in the next 12 – 18 months. States have estimated that millions of dollars in untapped tax revenues exist because they were unable to tax e-commerce sales; some of these states have begun to send notices for noncompliance, and others are expected to follow suit in the coming years. Because data about companies and their operations is increasingly available, it will only become easier for jurisdictions to be able to identify companies that are not complying.
Moving Forward with Wayfair Implications
You don’t have to navigate Wayfair’s implications for your business alone. Warren Averett offers businesses the information needed to make informed decisions about these changes, assists clients with consulting from a business process standpoint and offers guidance for all phases of adopting the new regulations. Click here to connect with an advisor who can offer tailored guidance for your company’s compliance.