Wayfair – A Year After the Supreme Court’s Decision
Originally published on July 15th, 2019 in GSCPA Current Accounts
After many years of not taking on cases addressing state nexus questions, last year the Supreme Court decided to hear a landmark case, now commonly referred to as “Wayfair.” The ruling, which fundamentally changed the landscape of state sales taxation, has since brought on a flurry of new activity across multiple state jurisdictions.
A Recap of the Decision
The Wayfair case dealt with the South Dakota law imposing a sales tax nexus on businesses that, in the prior calendar year, had either $100,000 of gross revenue or conducted more than 200 transactions with customers located in the state. The previous status quo, via the “Quill” case, had always required some kind of physical presence with a state either via a location or payroll before tax withholdings by a seller were required.
With the Supreme Court’s four-five ruling in the Wayfair case, the standards have changed significantly and in essence established a Wayfair checklist that ensures constitutionality. In addition to the above de minimis thresholds, laws cannot be enacted retroactively and have to adhere to the uniformity and simplification rules of the Streamlined Sales and Use Tax Agreement in order to be considered constitutional.
What Have States Done
Prior to the Wayfair decision, states already tried to enact and broaden the sales tax base to capture sales activity from out-of-state sellers. However, since the decision, many states have become active, adopting thresholds that are the same as South Dakota, while others are trying to push the envelope and go even further.
Pennsylvania, for instance, has established a registration or collection threshold of $10,000 – much lower than what the Supreme Court held constitutional. Many states that have enacted Wayfair-type laws are also failing to mirror Wayfair by only partially complying to the uniformity and simplification rules, if not ignoring them all together. The likelihood of state laws that deviate from the Wayfair decision being heard by the Supreme Court are slim, after all it took the Supreme Court over 25 years to hear another significant court case related to sales taxes after the 1992 decision in Quill. Congress also remains in a stalemate to act on any sales tax type legislation that might address a more uniform approach.
What is important for businesses to note is that even though on the surface these state laws seem very similar, they fluctuate greatly in the details. These differences could become significant when deciding where a business is required to collect sales tax as states will have different rules for where services are sourced. The differentiating factor could be a billing address for one state, while where the benefit of the services was received or where the service was performed for another.
How Will This Impact Businesses
While the laws were often previously referred to as “remote seller laws,” it’s important to keep in mind they will impact everyone, not just online sellers. These laws extend far beyond and include service companies that provide software as a service (SaaS), data processing services and repairs and maintenance on tangible goods to name just a few.
Next, most of these laws refer to “gross receipts” when referencing dollar amount thresholds. Several services are and were exempt from collection of state sales taxes, but will be included when assessing whether or not a gross receipt threshold was reached. Wholesalers will most likely be impacted and will need to register with states even though their sales are still exempt from taxation. Businesses that exceed the threshold but have exempt sales, need to make sure they have proper documentation in place showing exempt sales.
States will likely consider the legal entity to be the entity required to register and withhold sales taxes. This may result in multiple entities in consolidated groups being required to file with the same states. Businesses that have not yet determined their sales tax footprint should determine which states their sales are sourced to and the taxability of their product by state and entity.
With all of this in mind, the next step should be to develop compliance options. Considerations should include a cost/benefit analysis of not only filing in states where nexus exists, but also preemptively in states where activities are increasing. Businesses that find themselves in a position where state filings have been missed, should watch for state guidance on voluntary disclosure programs (VDA) or sales tax amnesty programs. With the changes in legislation, it is expected that a number of states will enact such programs to help businesses become compliant and remit sales tax going forward.
Some additional considerations include whether filings will be completed internally or outsourced. If internal, deciding who will be responsible, and if they have the appropriate expertise and resources to complete the task? Consideration should also be given to what other activities they should be accountable for, such as correspondence with the various states. Businesses who have already answered these questions should not only develop a plan to monitor changes to state laws, but also their product portfolio and sales footprint annually. Like anything else, it’s highly unlikely that the information gathered will remain static year over year.
While the Wayfair case has brought some clarity to the world of sales tax nexus, the Court has still not addressed nexus in the income and franchise tax worlds. As with nexus for sales taxes, the states have been trying to push boundaries and are moving ever more rapidly to an economic nexus model emboldened by the constitutionality of the economic nexus for sales taxes.
Now is the time for business to assess compliance here as well.