This is part one of our series on how the South Dakota v. Wayfair decision has changed the landscape for businesses over the past three years. Check out the other parts of the series: cost of compliance, marketplace nexus, and local tax issues. Stay tuned for the final article on audit trends.
On June 21, 2018, the U.S. Supreme Court released its fateful decision in South Dakota v. Wayfair. The Wayfair decision upended decades of the physical presence standard for remote sellers for sales tax nexus and allowed states to require remote sellers (who exceed certain economic thresholds) to collect sales tax on sales into their state.
The decision was monumental in the sales tax world to say the least. Three years later, the novelty has worn off but the impact on businesses of all sizes, industries, and locations is still going strong.
To understand how the sales tax obligations of companies across the company changed due to the Wayfair decision, we surveyed the Sales Tax Institute audience about their experiences. We also caught up with four sales tax experts, Jordan Goodman, SALT attorney at HMB Legal Counsel, Rochelle Friedman Walk, M&A attorney at Aegis Law, Cameron Stearns, Executive Vice President and CFO at Mountain Rose Herbs, and Diane Yetter, President and Founder of the Sales Tax Institute, to find out the major challenges for businesses and predictions for the future of nexus.
Three Years of Wayfair Survey Respondents
You can think about the rollout timeline of Wayfair legislation in a couple of ways. In terms of state adoption of economic nexus laws, there is almost 100% participation. The three holdout states up until this year, Florida, Kansas, and Missouri, have all passed legislation. Missouri will continue to be an outlier until the governor signs the legislation and the legislation will not be effective until 2023.
In terms of business awareness and compliance, Diane Yetter thinks we are still fairly early in the rollout. “If this were baseball, my gut says we’re still in about the fourth inning.” Mid-sized e-commerce businesses that already had some type of sales tax system in place prior to the Wayfair decision were able to take action and register in new states quicker than other business types. The same applied to some of the largest businesses in the U.S. that had robust systems in place that made incorporating additional state sales tax requirements easier.
For small e-commerce sellers that strictly sell on marketplaces like Amazon, the broadening adoption of marketplace facilitator laws across the states has meant that these small sellers have been able to skirt compliance obligations that the marketplace is now managing for them. But for those that were attempting to be compliant early on, the challenges with filing returns with little to no tax continues as many states are not allowing them to deregister.
Prior to the Wayfair decision, forty-four percent of our survey respondents were only registered in five states or less. Respondents that didn’t have to register in additional states post-Wayfair were primarily already registered in 40+ states or were small sellers with registrations in five states or less pre-Wayfair. However, most surveyed businesses faced growing registration requirements.
Who has yet to address new post-Wayfair requirements? Diane believes Business to business (B2B) sellers and service businesses are two suspects sitting on the sidelines because they don’t believe (or realize!) economic nexus applies to them. A lot of the hub bub with the Wayfair decision has surrounded “traditional” e-commerce sellers. What B2B sellers and service businesses may not realize is that economic nexus requirements do not distinguish between business types. If you make a sale remotely into another state with no physical presence in that state, that state’s economic nexus legislation is typically going to apply to you.
Jordan Goodman on whether businesses are up to speed post-Wayfair.
As we enter the fourth year of the Wayfair rollout, companies aware of their business footprint are closely monitoring their activities for sales tax purposes. Survey respondents keep a close eye on how their sales compare with state economic nexus thresholds and continue to work through registrations with new states.
Each state has its own variation of economic nexus rules in terms of the economic thresholds set, the types of sales (gross vs. retail vs. taxable) that are included towards those thresholds, the lookback period, and many other variables that add complexity for sellers trying to navigate these rules.
States not only have inconsistency among key definitions but have also changed their stances over time, such as dropping a transaction threshold or switching sourcing rules for remote sellers. It’s been a struggle, particularly for small businesses, to get their bearings in this new sales tax landscape prone to changes. Businesses have had to invest significant research time into the obligations for each state and still may not find the clarity they need from state laws or Department of Revenue guidance depending on their industry or the types of sales they make.
“It’s so confusing and took many hours to figure out what to do with each state for each of our clients. I am still so nervous that we have missed something or are misinterpreting each state’s requirements. This HAS to be made easier for everyone to stay in compliance.” – Kerrie Kuderko, HTA, LLC
Jordan Goodman sees a lot of confusion arising among his clients whose sales fall on the “borderlines” of economic nexus, fluctuating above and below the thresholds. This primarily affects smaller sellers whose sales may be inconsistent month to month, perhaps with one large sale that pushes them over a state’s threshold. Once you exceed a threshold, you have an obligation to register and collect tax. Because the energy and resources put towards taking those steps can be steep, Jordan advises, “If you start collecting and remitting, you can’t stop. Despite the fact that you may fall below the thresholds at some point, you’re buying into this [economic nexus] obligation.”
“It has been extremely frustrating because the rules/laws are different in every state and our specific business and industry means we have to register in a state for a single sale and report on a monthly basis even though we only collected tax for the single sale.” – Dawndy Hancy, Abel, LLC
Another scenario that has thrown many a seller for a loop is what to do when 100% of your sales are exempt because you sell 100% for resale or only offer services that are exempt. Post-Wayfair, some states say you still need to register and file even if you only make exempt sales. Diane sees this as an inconsistency in policy, “Before Wayfair, if 100% of your sales are exempt, you didn’t register unless you needed to be able to give a resale certificate or there was a risk a customer couldn’t provide an exemption certificate” she says. Businesses need to evaluate why their sales are exempt and what is the risk for not being registered. And of course, they need to monitor law changes if the reason is their products or services are exempt. We are seeing states broadening their tax base which could result in a requirement to registered. This just happened in Maryland with the taxation of digital goods and electronically delivered software.
What’s the reward of hurdling all these challenges and staying compliant? An obvious reward is that you stay out of audit trouble and avoid any costly penalties and interest. A less obvious one is that should the day come you want to sell your business or involve investors or file for an IPO, you must make representations and warranties about compliance with the law to your buyer – and that includes sales tax law.
As an M&A attorney, Rochelle Friedman Walk has seen several deals fall apart over sales tax liability. Businesses that haven’t figured out post-Wayfair sales tax compliance cannot indemnify the buyer from all risks and liabilities with sales tax. If you mismanage your economic nexus requirements before the time of sale, Rochelle believes that in some cases the risk may be so large it’s better for the company to shut down than to sell or to figure out compliance and attempt to sell at a later date.
Rochelle Walk on the importance of compliance for businesses – especially if you plan to sell your business.
As the dust begins to settle in the post-Wayfair landscape, what’s next for tax nexus? According to Diane and Rochelle, out-of-state sellers can expect broader requirements for state income tax. The Multistate Tax Commission has already begun discussions to abolish federal Public Law 86-272 that prohibits states from imposing a state income tax on out-of-state businesses that only have mere solicitation activities within the states. States will want to pursue sellers for state income tax if they can and this will add another layer of compliance complications for sellers. For many marketplace sellers, the presence of their inventory in a state violates the protections of PL 86-272 which requires the filing of income tax. Given many of these sellers are considered pass-through entities, this results in a filing requirement for not just the entity but also the partners, shareholders or members of the entity.
Another trend expected to gain momentum is the expansion of economic nexus concepts globally. A number of nexus-related changes are coming to Canada and the European Union on July 1, 2021. Today, around five percent of our survey respondents are focusing on getting compliant globally and will have to closely monitor how their sales are taxed abroad in light of these changes.
Diane, Jordan, Rochelle, and Cameron share what’s on the horizon for nexus.
While some U.S. businesses shift focus to foreign tax obligations, foreign companies are only just beginning to do the same for U.S. sales tax obligations. Three years post-Wayfair, Diane believes we are only in the first inning when it comes to foreign companies selling into the U.S. understanding their economic nexus footprint and registering with states to collect and remit tax.
One day three years ago changed the course of sales tax in the U.S. forever. No matter what type of seller you are or industry you are in, you need to understand how economic nexus affects your business. It’s the law of the land and principles of it are likely to be adapted to other tax types soon!
Sales tax compliance affects the overall health of your business by limiting financial impacts from audits and avoiding any unwanted sales tax liability surprises should you decide to sell your business one day.
And one final reminder: physical presence is still the first test for sales tax obligations in a state! The Wayfair decision did not change this. If you have physical presence in a state through people, property, or certain activities, you probably need to register and the economic nexus thresholds do not apply to you.
If you need help navigating economic nexus, make sure to check out the resources below. If you need personalized assistance to evaluate your obligations, we offer a Wayfair Risk Analysis that might be just the right thing for you.
Interested in the rest of the survey results? Want to be sent the rest of the Three Years of Wayfair series?
Click the button below to download a PDF version of our Three Years of South Dakota v. Wayfair survey. You’ll find insight into the impact of the decision on businesses registration efforts, marketplace obligations, audit requests, software and staffing requirements. You’ll also be added to a list to be sent Parts 2-5 (on the cost of compliance on businesses, local tax issues, audit trends, and marketplace nexus) of our Three Years of Wayfair blog series.