Before the advent of Wayfair, states adopted laws mandating sales tax filing responsibilities on remote sellers and marketplace facilitators based on economic nexus standards such as three-factor apportionment; affiliate nexus; click-through nexus and other criteria focused on business relationships.
How Will Wayfair Impact Your Business?
Wayfair’s biggest impact has been its swift implementation of state sales tax collection requirements for remote sellers, which may place significant compliance costs and exposure for state audits on companies with multistate sales presences.
Wayfair has recently removed Quill limitations that limit how many transactions or revenue thresholds a business must reach before being required to collect and remit sales tax, making this provision especially helpful for retail, eCommerce and digital goods/services companies without large nexus footprints.
As part of these changes, states with gross receipts or income tax regimes based on economic nexus now require out-of-state companies that reach sales tax collection thresholds to file and pay those taxes regardless. This will have a tremendously profound effect on companies.
How Will Wayfair Impact Your Tax Planning?
Wayfair continues to have an effectful influence on state and local tax planning, compliance, and operations five years later, from states lowering initial economic nexus thresholds to creating revenue sharing agreements – the landscape has never been more complex.
Prior to Wayfair, state governments were exploring strategies to increase sales tax collection from remote sellers and marketplace facilitators by expanding nexus standards and reporting requirements. Tennessee pursued affiliate nexus; Massachusetts sought click-through nexus; South Dakota relied upon large volumes of transactions with in-state customers as an indicator of physical presence; affiliate nexus was pursued by Tennessee while click-through nexus was considered by Massachusetts.
Due to these and other changes, businesses should assess both current and potential future tax risks in each state where they sell products and file taxes. Contact Warren Averett team for assistance in evaluating risk and developing an action plan moving forward.
What Can You Do Now?
Since Wayfair, many states have moved away from physical presence standards to require out-of-state sellers to collect sales tax based on either thresholds approaches or factor presence models; with latter approach using an entity’s economic activity such as revenue or sales within a state to determine its nexus presence there.
Additionally, sourcing laws have changed dramatically with many states now adopting destination-based sourcing rules while some still adhere to origin-based policies, which creates additional complexity for companies who must navigate sales and use tax compliance responsibilities.
RSM state and local tax professionals are available to assist clients in understanding the new sales and use tax landscape and devise an appropriate compliance strategy. Our team can assist with sales tax issues such as determining nexus and filing requirements as well as indirect taxes such as income, franchise, gross receipts and property.
What Can You Do in the Future?
Even as challenges continue to surface, it is essential that businesses stay abreast of state developments and proactively monitor their sales tax collection obligations. Many states have amended their initial post-Wayfair laws in order to lower revenue or transaction thresholds that trigger nexus (such as Tennessee decreasing their threshold from $500,000 to $100,000).
Some states that previously utilized origin-based sourcing laws for local tax imposition have recently switched over to destination-based sourcing practices as a result of Wayfair, creating more complicated compliance challenges and possibly impacting your rates in these states. This change can have serious ramifications on businesses with multiple locations within these states.
State tax authorities have taken to using economic nexus as the basis for imposing income taxes on non-sales tax transactions, creating potential difficulties in both timing and magnitude of income tax liabilities for businesses. We recommend consulting an RSM expert if you have questions about this trend and its ramifications for your organization.