The Focus - Our Tax E-Newsletter
Three Years After Wayfair
The U.S. Supreme Court’s South Dakota v. Wayfair decision was a landmark case affecting nearly every business, drastically expanding a seller’s obligation to collect sales tax in various states. Three years after the decision, states’ have had diverse reactions and have adopted various enforcement policies. While each state may have its own set of rules, one thing is certain, every business must review and address its sales tax collection obligations.
By now, many people are familiar with the term “economic nexus”. Prior to the Wayfair decision, a business was only required to collect sales tax from a customer residing in a state only if the business also had a physical presence within that state (i.e. office, employees). After Wayfair, if a business exceeds a certain amount of sales in a state, this economic activity establishes nexus, thereby creating a sales tax collection obligation, even if the business has no physical presence in the state. A common threshold is $100,000 in annual sales or 200 separate annual transactions. However, since every state has its own set of rules, economic nexus thresholds and enforcement policies vary state to state.
How Will a State Know?
If a seller does not have a physical presence in a state, how will the state know if they have economic nexus? This is a common question and many business owners have decided to take the let’s wait and see approach rather than complying. One thing is clear, states are finding out in various ways, including:
- Proactive notices - Many states are sending out notices stating that according to the Department of Revenue’s information, the business has exceeded the sales threshold related to economic nexus and are required to register and collect sales tax. If the business is truly over the threshold, it should register and begin to collect sales tax. If the business is below the threshold, it should respond to the notice, stating that its annual sales are below the threshold.
- Notices after registration - We’ve also seen notices questioning the start date on a business’s sales tax registration application. Many states will request sales information from prior years to determine if the business should have registered earlier.
- Cross-referencing – States can either gather information during an audit of a company’s customer, or cross reference other filings. For example, a state can use information from the income/franchise tax filing to identify companies that have exceeded the economic threshold, but are not registered or remitting sales tax.
- Other methods - Believe it or not, we have also heard of instances, where revenue agents, have identified non-compliers, by staking out truck stops and weigh stations, to detect companies delivering products into their state.
Whatever the method, with the budget crunch many states now face, they are using every resource available to identify additional sources of revenue, including sales tax.
Why Should I Comply?
- State Audits – Wayfair’s third anniversary is a meaningful one, as many states have a three-year statute of limitations for sales tax audits. Accordingly, states may have waited until now to begin auditing businesses so that they have a full-three years to review. As a result, sales audits of remote sellers could increase.
- Tax due diligence- If you are considering selling your business, be mindful that any sales tax obligations maybe identified during the tax due diligence process. This may lead to a reduction in the sales price, an increased escrow amount, or a delayed or unsuccessful sale.
- Financial statements – A potential liability related to an ignored sales tax obligation could lead to a material misstatement in the financial statements, if it is not recorded or disclosed.
- Penalties/Interest – Significant penalties and/or interest could apply based upon the amount of a company’s taxable sales within the state, the amount of time incurred, and each state’s individual rates.
What Should Your Business Do Now?
Three years after the Wayfair decision, it should be clear that economic nexus is here to stay. Businesses must have a plan for how to deal with the sales tax collection obligation. In doing so, a business should consider the following:
- Where and how much are your sales and services sold into each state?
- How do states treat the taxability of the products and services you sell?
- How does your business maintain and track exemption certificates?
- Has your business considered a technology, automation, or outsourcing solution?
- If your company has significant, out of state sales it might be worth the cost to have a sales tax nexus study done to evaluate if the products you are selling are subject to tax in a state or if you have a filing requirement in each state you do business in.
State tax changes can be overwhelming. A Wayfair checkup, including a nexus study, can help you understand your sales tax exposure and guide you with your compliance decisions. The professionals at Dermody, Burke & Brown are on top of the shifting sales tax rules and can help guide you through this analysis.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.